What Is the Difference Between a HELOC & a Home Equity Loan?
HELOC stands for home equity line of credit. The credit line allows a homeowner to tap into existing equity to obtain money. Home equity loans also use existing home equity as security in exchange for money. Banks approve HELOCs and home equity loans when favorable market conditions exist–increasing home values and accessible lending money usually lead to more loans approved. Homeowners might seek loans and lines of credit to make improvements, to consolidate debt or just to establish a safety net in the event of job loss or financial hardship.
HELOC Defined
A home equity line of credit extends an offer of credit to a borrower up to a predetermined amount. Just like a credit card, the lender puts a cap on possible spending. Unlike a credit card, a HELOC is a bonded debt. The lender arranges a homeowner’s land from the loan. In exchange for lower prices than credit cards offer, a homeowner risks losing his home in the event he defaults on obligations.
Home Equity Loan Defined
A home equity loan is a secured loan for a predetermined set amount. A borrower needs to show adequate income and a history of continuous first mortgage obligations to obtain prime or regular loans. Closing prices for home equity loans vary; some homeowners decide to tack onto the prices to the amount of the loan, restricting out-of-pocket payments.
Home Equity Line of Credit: Features
Home equity lines of credit are like credit cards in that no interest or interest is due until the homeowner really spends money. Home equity lines work well for people who plan on doing improvements a couple of months later on. Rates of interest can fluctuate on equity lines, though, so there is no guarantee that the rate available the date a credit line unlocks are the same when a person begins paying. Interest paid on HELOCs is tax deductible, which makes them a good vehicle for those trying to consolidate other debts. Check with a tax advisor for specifics.
Home Equity Loan: Features
Prime home equity loans are similar to conventional fixed-rate mortgages. The lender pays out the entire amount after approving the loan, and the recipient starts making payments instantly. Individuals who get fixed-rate home equity loans are aware that the interest rate and monthly payments remain the exact same for the life span of their loan. Home equity loans normally have higher rates of interest than the initial prices on lines of credit. The interest paid on home equity loans is usually tax-deductible. Check with a tax advisor about possible exceptions. Some loans include a prepayment penalty clause, which occupies a fee when a homeowner pays off the debt before a specified time.
Considerations
HELOCs and home equity loans both add to the combined loan-to-value ratio onto a home. The loan-to-value ratio contrasts how much a homeowner owes on a house to how much the house is now worth. A high loan-to-value ratio can put a homeowner submerged –he owes more than the value of their home–if housing prices fall. When a borrower does not make the monthly payments, the lender can begin foreclosure proceedings. Secured loans offer lower prices than credit cards just because the house provides the lender with security. Beware of creditors when applying for any equity loan or line of credit. The Federal Trade Commission gathers information regarding the possible dangers of HELOCs and home equity loans for customers.