Home Equity Loan vs HELOC

An equity loan, whether it is a home equity loan or a line of credit, is similar to a second mortgage and offers a way to conveniently resolve financial setbacks. Although home equity loans and lines of credit are both good options, each one has benefits and limitations. It is important to understand what both types of loans have to offer before making a choice.

Home Equity Loans

A home equity loan offers a fixed amount of money and your home is the collateral. Payments are based on fixed interest rates, which means you will be making the same payment each month for the life of the loan. Failure to make payments may result in the foreclosing of your home by the lender. A home equity loan is a comparatively secure type of equity loan, since the payment amounts are fixed for the term selected by the borrower. Although the amount that you can borrow may vary with respect to the lending institution and state regulations, usually you can borrow up to 85% of the equity of a home.

Although the amount that you can borrow may vary with respect to the lending institution and state regulations, usually you can borrow up to 85% of the equity of a home.

Home Equity Line of Credit

A home equity line of credit (HELOC) offers you an opportunity to withdraw cash as many times as you need to by establishing a line of credit to draw from. The repayments are set according to adjustable interest rates, so the amount you will be repaying may vary.

Like home equity loans, the home is still considered collateral in a HELOC. A HELOC comes with a number of benefits such as multiple withdrawals, tax benefits, and easy repayments, but these loans are a riskier long-term solution because they have adjustable interest rates.

How should you choose?

There are some things to think about before choosing any of the equity loan options.

• Withdrawal Amount
  Home equity loans offer a fixed amount that can be received only once, but HELOC offers multiple withdrawals up to a certain limit whenever they are needed.

• Interest Rate
  The interest rate remains fixed in case of the home equity loan, but it is adjustable for HELOC and there is a chance of fluctuation.

• Repayment Method
  With home equity loans, repayments are fixed amounts to be paid monthly. A HELOC has comparatively higher monthly payments and a choice to pay interest in installments in the beginning.

The factors mentioned above can help you make a wise decision about your financial future. The choice of whether a home equity loan or a home equity line of credit differs from person to person. Every person has unique financial situations so the considering all of the above factors in your own financial state is important.