If you want to make some essential home improvements or simply need cash to pay bills, you may be looking at your home's equity as a source of funding. First, home equity is the value of your home minus any outstanding mortgage balance. You can use that equity to secure a loan. Because a home equity loan is secured by your residence, you're able to get lower interest rates than, say, a loan with no collateral as security, as well as a possible tax benefit. There are two ways you can use it: through a loan or via a line of credit.
So what are the key differences between a home equity loan and a home equity line of credit? We’ll take a closer look and help you figure out which option may be best for your needs…
Home Equity Loans
Also called a second mortgage or a fixed-rate loan, a home equity loan lets you borrow one time at a fixed rate and pay fixed monthly or bi-weekly payments. You would use this option if you're looking for a one-time sum of money, perhaps for debt consolidation or a single home renovation project, such as the building of an addition or an extensive kitchen/bath remodel.
A home equity loan has an initial disbursement at closing, requires principal & interest payments to be repaid over a fixed period (typically ranging from five to 20 years), and usually has a fixed rate for the entire term.
Home Equity Line of Credit
Commonly known as a HELOC, a home equity line of credit allows you to access cash when you have a need for it. These loans typically come with a variable rate. As you pay down the principal with monthly payments, those funds become available again. HELOCs are a good choice if you need money spread out over intervals for things like medical bills, college tuition, or home improvements that you intend to do in stages.
A HELOC has a set credit limit from which you can access your funds at any time during the initial ten-year disbursement period. It has interest-only payments during the disbursement period, switches to principal & interest payments for the repayment period (usually 20 years), and comes with a variable interest rate, which fluctuates depending on changes in a reference rate, such as the Wall Street Journal Prime Rate.
Still Can’t Decide? Get the Best of Both
Knowing just the amount of the monthly payment or the interest rate is not enough. Pay close attention to fees including the loan processing fee, prepayment penalties, minimum draw requirements, appraisal, closing costs, document preparation, and recording fees or origination fees.
Our flexible 3-in-1 Advantage Plan puts you in control of a home equity plan that can change as often as your needs. This plan allows you to:
- Take advantage of a line of credit and a credit card.
- Take any portion of your line, convert it to a fixed-rate advance, and choose your repayment term...no application needed.
- Get up to three fixed-rate advances at a time.
- Each advance works like an installment loan with fixed payments for the term you choose.
- Fix your rate anytime without an application.
Having a credit line, fixed-rate advances, and a credit card all-in-one plan is an effective combination of features. If you want to learn more about home equity loans, HELOCs, or our 3-in-1 Advantage Plan, check out our Home Equity Loan options or download our free Equity Edge eGuide today.
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