Before we start discussing differences between the Home Equity Line of Credit and Home Equity Loan let us get some idea about it. Home equity loan and home equity line of credit are two financial instruments that can be taken against your existing home equity. They are usually taken to improve your financial position. But they put your house in line as collateral. So it is important for you to know all about these kinds of policies and which is better for you. It is always a wise choice to know the pros and cons of a policy before jumping into any conclusion. So let’s start our discussion with the home equity loan.
What is Home Equity Loan?
A home equity loan is simply where you are taking a second mortgage against your house. It might sound a little bit confusing.
Let us take an example.
Let’s say that your house is worth $200000. You have an existing mortgage on it and you owe $100000 on that mortgage. So that means there is $100000 of equity in the house. Paying your mortgage is a challenge. When you are doing so you might want to use that equity or some part of the equity for some other financial goals that you are looking to achieve. The simple way to do so is by taking out a home equity loan against the property.
Home equity loan might be a 10 or 20-year loan. You have to pay a little bit more interest rate in this kind of policy than you would pay on your regular mortgage. The reason behind it is the risk factor. Because if you don’t make payments then the bank that holds the first mortgage has the first right to your collateral. The lender of the home equity loan would be next in line. So because of that factor, there is a little bit more risk you pay a little more interest rate.
Now let us discuss the home equity line of credit.
What is the Home Equity Line of Credit?
A home equity line of credit is a line of credit that you can be taken by giving up the equity of your house. You can use the credit to consolidate other higher interest rate debts like credit card expenses. A home equity line of credit has a lower interest rate than some other types of loan and the interest may be tax-deductible.
In this type of borrowing, you are borrowing the loan against the available equity in your home. In this case, your house is used as the collateral for the line of the credit that the bank is willing to pay you. When you repay the loan the amount of credit replenished. It is much like a credit card. You can borrow against it again if you need to. The amount that you borrow you pay interest for that only. There is a draw period say for 10 years where you can borrow money and there is a repayment period say 20 years. After the draw period ends the repayment period begins.
Both in the case of home equity and the home equity line of credit the maximum a lender will lend you is the 85% of the valuation of your house minus the outstanding mortgage. It depends on the lender. Usually, the bracket of loan is between 70-90% of the valuation of your house. To get this kind of loan your credit score should be good. If you have a poor credit score then you will get less amount of money from this policy. If your credit score is on the higher side will give you the opportunity to take out more money from the lender. Paying your bills on time and by keeping your credit card balance on the lower side will certainly help you to improve your credit ratings.
Differences between home equity loan and home equity line of credit
Now it is time to discuss the differences between the home equity loan and the home equity line of credit.
#1: Borrowing the sum:
In HELOAN or home equity loan you can borrow the money in a lump sum. Whereas in HELOC or home equity line of credit you have the ability to borrow or draw money multiple times from an available balance. Its balance is determined by the equity that you are having without any mortgage.
#2: Interest Payment:
In home equity loan (HELOAN), you borrow a lump sum of money. So you are required to pay interest for the whole sum of money that you are borrowing. In home equity line of credit (HELOC) you get a line of credit for your equity. And you pay interest only on the money that you have borrowed not the entire line of credit that you are entitled to.
#3: Interest rates:
In home equity loan the interest rate is fixed. It gives you a clear idea of how much you have to pay. On the other hand in a home equity line of credit, the interest rates are variable. In changes from time to time. But some banks like Bank of America allows you to have a fixed rate of interest even in case of a home equity line of credit.
#4: Fund disbursement:
In home equity loan the money is drawn in a lump sum. Whereas you can draw money multiple times in home equity loan of credit.
#5: Average APRs:
The interest rates usually fluctuate with the market. But Home loan equity line of credit usually has lower interest rates than home equity loans.
So to sum up the discussion it is advisable that you should consult with a financial advisor before taking up the policy. Many insurance companies are providing HELOC and HELOAN these days like PenFed, Bank of America, etc. You must study well before taking up a policy. As in case of credit card borrowing the bank cannot take your home from you. But if you choose to convert your credit card outstanding into home equity the bank can take your home as the collateral because you are giving up your equity for the loan.
If you like this article please share it with your friends. Feel free to comment in our comment box below for more information. We will try to clarify your queries.