A Home Equity Loan vs. Home Equity Line of Credit
August 31, 2018
Homeowners who need access to large amounts of cash can use the equity they have in their home to receive a loan. Both a home equity loan and a home equity line of credit allow you to utilize the value from your home. Both types of loans are similar in that you are using your home as collateral, but they do have differences when it comes to repayment and how you access the funds.
What is a HELOC?
Think of a home equity line of credit similar to how you think of a credit card. You are given a maximum amount you can spend by a lender and you can continue to spend money until you hit that maximum. When it comes to repayment, you make payments based on what you actually spent, not on the full amount offered to you.
A home equity line of credit has what’s known as a “draw” period; this is the period in which you can access the funds a lender has made available to you - it’s typically 10 years. During the draw period you are usually only required to make interest-only payments. Most often HELOCs have variable interest rates; this means your monthly payment can rise if the interest rate on the loan increases. Once the draw period has ended you are required to make monthly payments on both the principal and interest. If you only made the minimum monthly payments on interest during the draw period, this can make for a long repayment period, depending on how much you borrowed.
A home equity line of credit may be best when you don’t know exactly how much money you’re going to need. They can be useful during a remodel when you will be paying contractors, plumbers and landscapers over time. You will want to keep a record of who you are paying what for, and how much. It may be easy to borrow more than you had planned, this will help you check-in on where you are at.
What is an HEL?
A home equity loan is more typical of other loans. When you take out a home equity loan you receive a set amount of money at one time. An advantage to home equity loans is that they have a fixed rate, giving you the security of knowing how much you will pay each month over the life of the loan. You know exactly how much you are borrowing and don’t have the temptation to use more than you had planned.
A home equity loan is great when you have one large expense that you need to pay for. It will have a lower interest rate than say a credit card or personal loan because your home is collateral. If you use the loan to buy, build or substantially improve your home, the interest you pay on it may be tax deductible.
Which one is right for you?
When making the decision between a home equity loan or a home equity line of credit, consider what you need money for and when. There are upsides to each of these options, it’ll depend on your needs as a homeowner and what will make the most sense for your situation.
If you are thinking about either of these options, Greater Iowa Credit Union can help you out. For a limited time we are offering no closing costs on home equity loans and home equity lines of credit. To learn more and start your application, click here. We would love to help you!