Home Equity Loan vs. HELOC
3 min. read
By: FCU Team
Do you have big expenses coming around the corner, like a wedding, a home renovation, or college tuition but lack the necessary funds to pay for it? Are you in debt and struggling to keep up with high-interest payments?
Your home might be the solution to your financial problem! The same place where you eat, sleep, and spend most of your time in is potentially full of equity that can be tapped into to provide the funds for whatever needs you may have.
First we need to understand what "equity" is. Home equity is the value of your home, subtracted by how much you owe. Say you own a home valued at $280,000 and you still owe $205,000 on your mortgage. Your home’s equity would be equal to $75,000.
Typically, homes are viewed as long-term investments. They accrue value over time but that money isn’t liquid. You’ll see the return on your investment once you decide to sell. But until then, your budget is still limited to the liquid money you have access to in your day-to-day.
The reality is that when you have big expenses on the horizon, potential future earnings won’t do you much good. Luckily, there are easy ways to unlock the value of your home in the here-and-now.
There are two such options that you can take advantage of to turn your home’s equity into real money that you can use: a home equity loan, and a home equity line of credit. You'll find a video below that explains the nuances of each in less than two minutes! It's important to know the difference between the two options so you know which will cater more to your needs.
Home Equity Loan
A home equity loan is a one-time lump sum paid back in monthly installments.
The amount you qualify for is based on your home’s equity, your mortgage payment value and term, your income and your credit history. In some cases, the interest you pay can also be tax-deductible. These types of loans are great for debt consolidation, allowing you to replace high interest payments with one, simple, low-interest monthly payment.
A home equity loan can also be an investment in your home since you can pour the borrowed money into a home renovation project. Imagine your home with a brand new bathroom, a pool in the backyard, a sun room, or an updated kitchen.
A home equity line of credit, or HELOC, allows you to continually borrow money up to a certain amount. As you pay off the principal, your credit revolves, allowing you to use it again. Unlike a loan, you only pay interest on the amount of money you borrow.
A line of credit can be great for when you may have multiple expenses down the road at various times, or are just unsure about the total amount of money you’ll need.