You want to make some improvements to your property and you have enough equity to cover the expenses. Now, you’re wondering if you should apply for a home equity loan or a line of credit. Some people mistakenly believe the two are pretty much the same. But the similarities end after using your home’s equity. There are differences between a loan and credit line, so you’ll have to choose wisely.
Home Equity and Lines of Credit Explained
The main difference between a home equity loan and a line of credit, which are often referred to as a “HELOC”, is that the latter isn’t a loan at all. It functions more like a secured credit card or a debit card and your home’s equity is the balance in the bank.
While there are similarities between these and other home loans, they have their own unique characteristics. Both have their place as valuable tools in the homeowner’s financial arsenal as ways to tap into a home’s equity. —San Francisco Chronicle
As for home equity loans, these are generally a shorter term than a traditional mortgage. Home equity loans generally have lower interest rates but shorter terms, typically ranging from 10 to 15 years. And if you take the money out as cash, you’ll be limited to the amount you can borrow, decreasing generally 5 to 10 percent.
Questions to Ask Yourself
There are more considerations at play in these situations. So, here are some key questions you should answer before making a decision:
- Lump sum or installments? If you need all the money up-front, a home equity loan will be a better fit. But if you’re making improvements incrementally, a line of credit will work best.
- What’s the purpose of tapping into equity? If you are remodeling your home or making a large purchase like a recreational vehicle, a home equity loan will be the best match. But if you’re paying for a wedding or are financing a couple of semesters of college, get a line of credit.
- How much can I afford each month? This is a big one because if you take out a home equity loan, you’ll have to make principal and interest payments each month. Whereas a line of credit will allow you to only pay interest, at least of a few years.
- Can I handle the money responsibly? If you go with a HELOC, will you act like a teenage girl with daddy’s credit card?
Lastly, consider interest. Home equity loans are fixed and lines of credit are variable. So, choose what will best fit your budget.
Fred Mullins, PA, Donna Mullins, Erin Biby
Coldwell Banker Schmitt Real Estate Company
1201 White Street, Suite 101
Key West, FL, 33040