Your home can provide you with a convenient and affordable way to consolidate debt or to pay for your child’s college education. Assuming that you have sufficient equity in your home, it may be possible to get either a HELOC or a home equity loan. Let’s look at the differences between the two and how they can help you meet your financial goals.
HELOC = Home Equity Line of Credit
A HELOC is a revolving line of credit, which means that the amount you can borrow gets replenished every time you pay it off. It is similar to a credit card because you are usually charged interest on the outstanding balance. Unlike a credit card, you are generally only required to make interest payments each month. The principal balance is paid off with a single payment at the end of the loan’s term.
Home Equity Loans
A home equity loan is often referred to as a second mortgage because the loan proceeds are released in a single lump sum. The loan is typically repaid in monthly installments that include both an interest and a principal payment. As this type of home loan is more like a mortgage than a credit card, the interest rate is generally lower.
You will need to submit to a credit check as well as have your home appraised to determine the loan amount and your interest rate. Home equity loans can be used to pay off your debt, to start a business, or to pad your bank account during lean financial times.
Both Are Secured Loans
Both a HELOC and a home equity loan are secured by your home. Therefore, if you are unable to make the payments on time, the lender has the right to foreclose on your property. This is true even if that lender has a junior lien and if the original mortgage is current. In the event that you are struggling to keep up with the debt, it may be possible to refinance your debt to extend the loan term or to lower the interest rate.
If you have good credit, you may be able to use your home’s equity to get tens of thousands of dollars at a low-interest rate. Still not sure which you need? Talk to us for more insight about how this type of loan can best meet your needs.
References:
- HELOC vs. Home Equity Loans | Suffolk Federal Credit Union
Secured vs. Unsecured Loans | GreenPath Financial Wellness
