HELOC vs Home Equity Loan: Which is the Better Option? Many people confuse home equity loans and home equity lines of credit (HELOCs) with each other, believing that they’re the same thing. Although they are both used to secure a borrower’s home, they work in very different ways. The home is used as collateral until the loan or line of credit is paid off. If not, then you could possibly lose your home. But what are the key differences between them?
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HELOC vs. Home Equity Loan
How HELOCs Operate?
A HELOC is a revolving line of credit that allows the borrower to take out money against a credit line up to a preset limit. Payments can be made and more money can be taken out again up to this limit. Interest rates can determine which line of credit you want to open, as heloc rates utah might be different from another state so you must shop around. Interest rates can also change over time, depending on how the market is going.
How Home Equity Loans Operate?
A home equity loan is a fixed-term loan that is granted to a borrower based on the equity they have in their home. They are sometimes referred to as second mortgages and are usually for a set amount that is provided to the borrower upfront, instead of the borrower taking out as much as they need until the preset limit has been drained. Interest rates are usually fixed and won’t change over time.
Pros of HELOCs:
There are some advantages that HELOCs have over home equity loans. These include:
- The borrower has a choice over how big or small they want their line of credit to be
- HELOCs generally have lower interest rates than other options for obtaining cash
- A credit line is great to have in case of emergencies
- Because they have variable interest rates, it is possible for interest rates and payments to go down as the market changes or your credit improves
Cons of HELOCs:
That doesn’t mean that HELOCs are perfect. They do come with some disadvantages that you should be aware of.
- If you miss out on payments, you might lose your home
- Variable interest rates mean that your rates can also go up
- Variable interest rates and payments can make it difficult for you to budget properly
- It can be easy to impulse-spend up to the credit line limit
Pros of Home Equity Loans:
Home equity loans have their own pros over HELOCs, such as:
- Fixed monthly payments make it easy for you to budget
- Generally has lower interest rates than other forms of borrowing cash
- Fixed loan amount makes impulse spending less likely
Cons of Home Equity Loans:
Home equity loans do have some drawbacks to them that could make you think twice:
- You can lose your home if you don’t make payments
- You’re not able to take out more money in the event of an emergency
- To obtain a lower interest rate, you have to refinance
In general, a HELOC is a good option for those who want some flexibility in the money that they are borrowing. A home equity loan is a good option for those who know how much they need to borrow and how they will spend the money. Each works differently for different people and their needs, so if you’re not sure which is right for you, feel free to speak to a financial advisor as soon as possible.
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