Two of the most common options for borrowing money against the value of your home are the HELOC (Home Equity Line of Credit) and a Home Equity Loan. In fact, you may not even see them as two separate options. But there are some key differences between them. Let's take a look at those differences, and when you may want to consider one over the other.
What is Home Equity?
Before we dive into the differences, let's understand what home equity is. Home equity is the difference between the market value of your home and the amount you still owe on your mortgage. For example, if your house is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in home equity.
Home Equity Loan: The Basics
A Home Equity Loan is like getting a second mortgage. You borrow a lump sum of money and repay it over a fixed period, usually with a fixed interest rate. This means your monthly payments are predictable, making it easier to budget.
Key Points:
- Lump Sum: You get all the money at once.
- Fixed Interest Rate: Your interest rate doesn’t change.
- Fixed Term: You repay the loan over a set number of years.
- Consistent Payments: Your monthly payments stay the same.
Example: Let’s say you need $30,000 for a major home renovation. With a Home Equity Loan, you would receive $30,000 up front and start making fixed monthly payments until the loan is paid off.
HELOC: The Basics
A HELOC, or Home Equity Line of Credit, works more like a credit card. Instead of borrowing a lump sum, you get a line of credit that you can draw from as needed, up to a certain limit. You only pay interest on the amount you actually borrow, not the entire line of credit.
Key Points:
- Line of Credit: You can borrow as little or as much as you need, up to your limit.
- Variable Interest Rate: The interest rate can change over time.
- Flexible Borrowing: You can borrow, repay, and borrow again as needed.
- Interest-Only Payments: During the draw period (usually 5-10 years), you might only need to make interest payments.
Example: If you have a HELOC with a $30,000 limit, you can borrow $5,000 now for a car repair, then another $10,000 later for tuition, and only pay interest on what you've borrowed.
When to Choose a Home Equity Loan
A Home Equity Loan might be better if you:
- Need a large amount of money at once. For instance, if you’re paying for a big home improvement project or consolidating debt.
- Prefer predictable payments. Since the interest rate and monthly payments are fixed, it’s easier to plan your budget.
- Want a fixed interest rate. This means your rate won’t increase over time, giving you peace of mind.
When to Choose a HELOC
A HELOC might be better if you:
- Need access to money over a period of time. For example, if you’re doing a series of smaller home repairs or want a safety net for unexpected expenses.
- Want flexibility in borrowing. You can borrow, repay, and borrow again as needed, which is handy for ongoing projects or fluctuating expenses.
- Are okay with variable interest rates. While these can be lower initially, they can increase or decrease over time.
Choosing between a Home Equity Loan and a HELOC can feel a bit like picking between chocolate and vanilla ice cream – both are great, but each has its own appeal. If you need a big chunk of money upfront with steady, predictable payments, a Home Equity Loan might be your flavor. On the other hand, if you prefer the flexibility to dip into funds as needed, a HELOC could be your go-to treat.
And here’s a sweet tip: Check out the fantastic rates and unique benefits offered by Radiant Credit Union. Whether you’re leaning towards a HELOC or a Home Equity Loan, Radiant Credit Union has options that can suit your needs and help you make the most of your home’s equity.