Home Equity Loan vs. Home Equity Lines of Credit
Once you’ve built up some equity in your home, you might consider getting a home equity loan or home equity line of credit (HELOC) to pay for renovations, vacations, college, or just about any other purpose. But first, you need to decide which one is right for you!
This quick guide explains the similarities and differences between these useful financial products so you can make an informed choice. Read on to find out everything you need to know about home equity loans vs. home equity lines of credit.
Similarities: Home Equity Loan vs. Home Equity Line of Credit
Of course, the main similarity between a home equity loan and HELOC is that they both leverage the equity in your home to give you access to cash. You can use home equity calculators to see how a monthly payment could fit into your budget.
You Need Equity
A home equity loan or line of credit typically lets you borrow up to 95% or even 100% of your equity. To work out if you have any home equity, take the current market value of your home and subtract your mortgage balance.
With home prices rising in Northern Virginia, chances are you’ve gained a nice chunk of equity that’s just waiting to be put to great use!
Possible Tax Benefits
Both home equity loans and lines of credit offer potential tax advantages because the interest you pay might be tax-deductible, (please consult your tax advisor about your situation). Here’s how you can get the benefits:
- Funds must be used to “buy, build or substantially improve” your home for the tax to be deductible, so you need to itemize what you use any of your funds for.
- Your total mortgage debt needs to be less than $750,000 or $1 million, depending on when your mortgage originated.
- If you’re married and filing separately from your spouse, the limits are $375,000 or $500,000.
Differences: Home Equity Loan vs. Home Equity Line of Credit
There are a few important differences between home equity loans and lines of credit, so be sure to weigh the details when deciding which one is right for you.
How the Loans Work
A home equity loan is a type of installment loan whereas a HELOC is a source of revolving credit. Here’s what that means:
- A home equity loan gives you a lump sum payment that you pay back in equal installments each month through your loan term.
- A home equity line of credit works more like a credit card, giving you access to funds to use as needed through your draw period.
Repayment Terms
Home equity loan repayment terms:
- A home equity loan offers a range of terms, from 5 to 20 years, or a 10-year balloon loan where you make smaller payments for ten years and then pay one larger sum.
- Just like any other installment loan, shorter terms get lower rates but come with higher monthly payments.
- Longer terms get higher rates but your monthly payment might be smaller and therefore more affordable.
HELOC repayment terms:
- A home equity line of credit comes with a draw period of 10 or 20 years, which is the time when you can use the funds.
- You then enter the repayment period of your HELOC when you need to pay back the principal funds in full, plus interest.
Interest
For both a home equity loan and line of credit, you get an interest rate based on your creditworthiness—but rates on home equity loans are often slightly lower than home equity lines of credit.
Home equity loan interest:
- Interest on a home equity loan is usually a fixed rate and the amount you pay each month will be a percentage of the balance on your principal.
- The monthly payment for a home equity loan is always the same but at the start of your term, more of your payment goes towards interest because your balance is higher.
HELOC interest:
- Interest on a home equity line of credit is often variable and you only pay interest on the portion of funds you use – so if you have a zero balance, you won’t pay any interest.
Applying for a Home Equity Loan or HELOC
The application process for home equity loans and lines of credit is similar to getting a home loan, but you should find it easier this time around because you’ve already bought a home!
We want to make sure you can comfortably afford your loan, so you’ll need to provide all the same information and documents, including:
- Government-issued photo ID plus proof of address, DOB, SSN, marital status, and employment status
- Income type, amount, and frequency with recent paystubs and W-2s
- Evidence of other income such as alimony, child support, or separate maintenance, pension, rental, retirement account, Social Security, trust
- Tax returns
- Profit & Loss Statement and Balance Sheet, if you are self-employed
- Property type, estimated value, and mortgage balance with your current mortgage billing statement
- Homeowners’ insurance policy declarations page
- Flood insurance policy declarations page, if your property is in a flood zone
On your behalf, we can get a valuation for your property and find out about existing debts or liens. We can help you solve any complications before moving forward!
Choosing a Home Equity Loan or Line of Credit
It’s not easy to choose between a home equity loan vs. a home equity line of credit because they’re both great options for funding remodeling projects, debt consolidation, weddings, and more!
So if you’re still not sure which one is right for you, ask yourself whether you want a lump sum and regular monthly payments, or if you would prefer to have access to cash only when you need it. Click below for details!