A home costs a lot of money, and for many people, all of the investment that they’ve placed into their home by paying on their mortgage for years—or in other words, the “equity” that they have built in their home—is locked up and unavailable for use.
However, vehicles such as home equity loans and HELOCs (home equity lines of credit) are available to give homeowners access to the cash value that they have placed in their home thus far. Choosing which one is right for you depends on a number of factors, so be sure that you thoroughly investigate both options before making a decision.
A Home Equity Loan vs. HELOC: What They Mean
In order to understand how a HELOC and HELOAN function, you must first understand equity. The term equity refers to how much of the home’s value you actually own; if you have a $150,000 mortgage and have paid off $50,000, you have $50,000 in equity.
Now that you understand this important keystone of the process, consider how home equity loans and HELOCs work. With a home equity loan, you are taking a loan out and using your home and your equity in it as collateral. Just like most other loans, you receive the full amount as a lump sum and then pay back that amount over time.
Typically, the amount you can secure for a home equity loan is limited only to the equity you have in the home, or a percentage of the equity. For example, lenders may only issue a loan for 80% of your equity value, which means that if you have $50,000 in home equity, you would qualify for a loan of up to $40,000. You are not required to take the full amount of the loan; if you only need $10,000, you may take just the $10,000 as a loan.
A HELOC, which is short for a home equity line of credit, is a similar means of using your equity to secure financial liquidity, but it operates differently. A line of credit is the same principle that informs credit cards; you operate within a “limit” on the monetary amount you can use, and when you repay what you have used, that money becomes available again. So think of a HELOC as a credit card that uses your home as collateral. Like a home equity loan, the amount that you qualify for will be determined by your equity.
Benefits Of A Home Equity Loan
A home equity loan can be an advantageous tool, because it provides you with a lump sum payment. If you need to tackle large financial obligations, a home equity loan can help you to do so. Some of the most common reasons that people take out a home equity loan include funding education costs, paying medical bills, consolidating debt with high interest rates into a lower rate loan or covering the cost of home repairs and renovations.
Home equity loans can be predictable, because many operate on a fixed interest rate that ensures you will see the same payment each month. This lets you plan exactly how long it will take you to pay off.
Advantages Of A HELOC
A HELOC provides a lot of flexibility and is usually something that you set up ahead of time, before you need it. One of the main advantages of a HELOC is that, unlike a home equity loan, you do not necessarily need to pay every month. You only use a HELOC when you need it—like a credit card—and if you have not charged any money against the account, you do not owe anything.
Interest only accrues when you have a balance; this means that you only pay for money you actually use. For many people, a HELOC is a way to ensure that large purchases and financial needs can be covered if needed without actively taking out a loan.
Talk With The Experts To Determine Which Option Is Right For You
Both home equity loans and lines of credit have their advantages and disadvantages, and they will both impact your financial future in important ways. This is why it is vital that you make the right choice for your situation. If you are unsure whether a home equity line of credit or loan is right for you, the experts at Fairfax Mortgage Investments would be happy to walk you through each financial vehicle and how you can benefit. Reach out to schedule an appointment with any questions and to start the process of securing a loan or line of credit on your home’s equity.
