If you’re in the market for a loan, you need to make sure you find the best option for you. With homeowners wanting to get cash out of their homes, the home equity loan market is on the rise, as are home equity lines of credit. But what’s the difference between these two? In this article, we’re clearing up the confusion between a home equity line of credit vs home equity loan once and for all!
What Is A Home Equity Loan?
In a nutshell, home equity loans are pretty much second mortgages. In addition, you’re more than likely to get a fixed rate. And you’ll make a payment that covers both your principal and your interest on a monthly basis.
Your money advanced to you in a lump sum, so these are ideal for larger, one-time purchases.
Remember though, that your home is the security for your loan. This means that if you don’t make your payments, you’re putting your home at risk.
You’ll also have to pay for your closing costs when you first take out your loan.
The good news?
Your interest could even be tax deductible if you’ve borrowed $100,000 and under. Also, it’s likely that your interest rate will remain low.
What Is A Home Equity Line Of Credit?
Home equity lines of credit are more difficult to understand than home equity loans. But they’re both as valuable depending on your needs.
Please note that you’re likely to see this abbreviated as HELOC in lots of places.
This will give you a line of credit that you can pull funds from whenever you need. You can’t request an additional advance, once you reach the most amount of funds you can borrow.
Like with home equity loans, you’ll also have to make a payment every month on a home equity line of credit.
The benefit is that you are often allowed to make payments that are interest-only for a period of time. Once your general repayment period has come to a close, it will be time to pay down whatever is on your balance.
You’ll notice that the structure here is like what you do when you pay your monthly credit card bill.
As with the equity loans, your home will still serve as collateral in this line of credit. So, as with any financial decision, you’ll need to think hard before you jump to sign up.
A line of credit option is a wonderful choice if you have an ongoing project, like a home remodel. That way, you know you’ll always be able to get the cash you need to pay for the project from somewhere.
Where Can I Learn More?
Now that you’re clear on the difference between a home equity line of credit vs home equity loan, maybe you have a few other credit, loan, and more general financial questions you’d like to have answered.
I would guess that either one of these options would require an assessment of the property and home. Would I be correct? Do market downturns then naturally impact your available loan/line of credit? Some are predicting another market correction by 2019. So would it be wise or unwise to secure a loan/HELOC before something like this happening?
Neil – It would definitely be wise to secure a HEL or HELOC now, as real estate values may be impacted soon. And yes your lender will require a recent appraisal of your property value before they would approve your loan.
As you may already know, we are in the ninth year of an expanding stock market cycle. As you mentioned, many economists are predicting a possible recession by 2019.
If you get approved for a home equity line of credit now at least it will establish the highest possible line amount available.
Something to also keep in mind is that lenders suspended advances on lines of credit back during the crash in 2008. Hopefully it won’t happen again. However, check your loan doc’s to see if this limitation can be imposed by your lender.
A word of caution, rates are on the rise and HELOC’s are adjustable rate, so expect to pay more on your loan in the future as your index gets adjusted. Again, check your loan documents before you sign on the bottom line.