Home Equity Loans and Home Equity Line of Credit (HELOC)

Couple reviewing home equity loan

Home equity is determined by the market value of a home after the property owner has paid off all debts – like interest and mortgage. The terms “home equity” and “home equity line of credit” may sound the same, but both loans operate in very different ways.

Home Equity Loan

This type of loan operates like an auto loan – meaning that when you get approved, you get the total deposited into your bank account in one lump sum. Borrowers are subjected to monthly payments, which include principal and interest. It’s important to note that you are borrowing against your home’s equity. This means that you are using the equity of your home as collateral with the bank. When considering a home equity loan, you will have to determine whether a fixed or a variable rate is better for you.

  • Fixed Rate

The monthly interest percentage remains the same for the entire loan term. This means that you can budget your monthly payments without having to worry about increasing costs.

  • Variable Rate

The monthly interest percentage is dependent on the market, meaning your rate changes. The introductory costs are lower than a fixed rate loan, which means more money in your pocket.

A loan is a big commitment. It requires financial planning and stability. Consider these pros and cons before taking on a long-term responsibility.

  • PROS
    • Low interest rates
    • Easy approval – in large sums
    • Eligible for certain tax benefits
  • CONS
    • Your home is collateral, which means it’s at risk
    • Closing costs – such as origination, notary, title search, credit report, and documentation fees
    • Decreasing your home’s overall value by tapping into its equity

Home Equity Line of Credit (HELOC)

This type of loan operates more like a credit card. Borrowers are given a line of credit that’s available to them over a certain period of time – called the draw period. During the draw period, borrowers can withdraw and spend money as they need it. When the draw period ends, borrowers enter a repayment period, where they pay off the outstanding balance on top of interest accrued over the period.

Again, a loan is a big commitment. Consider these pros and cons before deciding on a HELOC.

  • PROS
    • Flexibility with amount of money borrowed – just like a credit card
    • Your payments won’t start until you access the funds
    • Low interest rates
    • Fast approval process
  • CONS
    • Unpredictable payments
    • Your home is at risk – if you default on your payments
    • Lender can decrease or end your line of credit

Both types of loans can be beneficial for borrowers, especially if they’re used correctly. Check out this list of home equity do’s and don’ts before committing to a long-term loan.

For more information about getting a Home Equity Loan or HELOC, contact 365 Live, our 24-hour call center at 800.664.3828.