Home Equity Credit Line (HELOCS) and Home Equity Loans are two ways to borrow money for the ownership you have in your home. Both can usually increase the value of your home to up to 80 or 85% (or even more).
Let’s take a closer look at how Helocs and Home Equity Loans work and how to determine what’s best for you.
Key differences between HELOC and home equity loans
Both are borrowing methods and are backed by the home, so household equity loans and Helock work differently. A home equity loan is an installment loan that offers a lump sum payment at a fixed interest rate and a repayment period. HELOC is a revolving obligation that provides an amount that can be withdrawn at a variety of interest rates (replenishable balances similar to credit card restrictions). You can borrow a set for a period of time and then repay it for the next period.
Here are a few other traits that highlight Helocs and Home Equity Loans.
Home Equity Loan |
helic |
|---|---|
| Fixed interest rate | Fluid interest rates |
| Payments remain the same for loan life | Monthly payments may increase or decrease |
| You will receive funds in one lump sum payment | withdraw funds for a credit line as needed over a given period |
| Interest applies to the entire loan amount | Interest charged only with withdrawn funds |
| Principal repayments will begin soon | Principal repayments can be postponed |
Home Equity Loan vs Credit Line: Pros and Cons
Both home equity loans and HELOCs tend to have lower interest rates than credit cards and personal loans, making them more affordable borrowing methods. This is their individual strengths and weaknesses.
How can I use Home Equity?
Using both Home Equity Loans and HELOCs will allow you to use the right funds. Many borrowers use them to pay for major home repairs and renovations, such as finishing the basement, kitchen remodeling, and bathroom updates. Others use them to pay off high-profit credit card debts, cover and cover business costs.
So, how much money can you borrow from a Home Equity Loan or HELOC? Often quite a bit. Lenders often set a minimum of $10,000, with a maximum of six digits.
However, the exact amount you can borrow depends on several factors, including the interests of the stock and the maximum share rate that a lender can borrow. Your mortgage balance also plays a role as your lender typically requires a load of your overall housing debt to fall below a certain percentage of the value of your home.
For example, let’s say your home is valued at $350,000 and you still owe $150,000 on a mortgage. This means you built the stock for $200,000, but it doesn’t mean you have access to the full amount.
If your lender says your debt needs to be below 80% of the value of your home, that’s the $280,000 cap. If you subtract the remaining mortgage balance from it, you’ll have $130,000 of tapable stock. It’s still a fair amount, but probably not as much as you imagined.
Helocs and Home Equity Loans Requirements
Each lender has its own eligibility criteria for Home Equity Loan and Helock. However, here are some general guidelines to keep in mind.
- Credit score: A credit score of 640 is sufficient for some lenders, but they aim to go above 700 (and get the highest interest rate) to have the highest approval odds.
- income: Your income must be consistent and verifiable.
- Revenue to debt (ratio): To qualify for approximately 43% funding, you need an acceptable DTI.
- impartial: Lenders usually allow you to borrow from 80% and 90% of your household. This is the difference between the value of your home and what you owe.
- evaluation: The lender will need an assessment to determine how valuable your home is or its fair market value. (Note: valuations are arranged by the lender and fees are included in the closing fee).
Get a home equity loan or credit line
How to get a home equity loan
Home equity loans are available through banks, credit unions and online lenders. Some people offer online prequalification tools that allow you to view loan offers on estimated monthly payments and terms without affecting your credit score.
If you decide to formally apply, you can usually start the process online and upload the requested document to receive a loan decision. You can also visit the branch if you are doing business with traditional banks or credit unions. Either way, if you formally apply for a home equity loan, you will get a hard pull that will affect your credit score.
Note: Home Equity Loans come with a 3-day cancellation rule. This allows you to withdraw from your contract without penalty within three business days.
How to get HELOC
As with qualifications, the process of obtaining a home equity loan and HELOC is similar. However, HELOC can be equipped with stricter standards, which can be difficult to obtain in some cases. For example, peer-to-peer lender Prosper sets a minimum of 660 credit score of 640 for HELOCS vs Home Equity Loans.
The 3-day withdrawal rule also applies to HELOC.
Choose Heloc or Home Equity Loan: Which is correct for you?
How to determine your home equity loan and HELOC? Ask yourself these questions.
What is the nature of your needs?
A home equity loan could fit right if you know what you use your funds, when you need them, and exactly how much you need. However, Helock may not know exactly what total costs will be incurred, and/or may need to have a ready source of funds handy. Or if the costs are extended over a long period of time (e.g. paying housing contractors in installments, four-year university tuition fees).
Are you a Set and Forget It type?
Do you prefer the predictability of your obligations? If your fixed interest rate and monthly payments remain the same, a home equity loan is ideal. And you are not an interest watcher.
HELOC, on the other hand, is ideal if you are trapped at a higher interest rate than the market or dislike the idea of paying interest on money you haven’t spent. Also, you don’t mind – and have a means to cover – payment variations.
Are you being punished?
HELOCs can be a slippery slope of more debt than they can handle if they pay off interest during the draw period and none of the principals pays back. Taking this approach can start the HELOC repayment phase and cause sticker shocks when there is a significant amount of debt remaining in the repayment. Unless you expect to fall into a substantial amount or windfall in the future, we recommend paying both the principal and interest in HELOC during the draw period.
If that’s not you, a home equity loan might be the better option as it will charge you a repayment schedule, just like a mortgage. It helps to prevent your debt from becoming out of control.
Home Equity Loan and Helock’s conclusion
Both Home Equity Loans and HELOCs can borrow money for your home equity, but they are not the same. Think about the purpose of your funds, the amount you need, and whether you want to borrow more in the future.
For example, if you want a lump sum up ahead, a predictable repayment schedule and total, a home equity loan might be the right choice. The trade-off is that you need to know exactly what you want to borrow. Otherwise, it could end up more or less than necessary. But if that’s the case, a loan might be ideal for solving lots of credit card bills.
On the other hand, if you need the funds you need, or if you want the option to take away more money and need it, and you’re just interested in an actual withdrawal, HELOC may be the better option. However, disciplinary action must be taken when repaying the principal and carry out the shaking with monthly payments.
Additional Reports by Linda Bell
