Are you a first-time homebuyer or an experienced seller? Considering getting a home equity loan or line of credit?
Before making this major financial decision, it’s essential to understand the differences between these two mortgage loan products.
Fortunately, you landed on the right article. Below we break down everything you need to know about home equity loan vs line of credit. Read on!
Home Equity Loan vs Line of Credit: The Differences
A home equity loan and a home equity line of credit (HELOC) are two different types of loans that use your home as collateral. The equity is the value of your home minus any outstanding mortgages or other claims against it.
Both a home equity loan and a home equity line of credit are categorized as the second mortgage. The main difference between a home equity loan and a line of credit is how you get the money, and how and when you have to pay it back. They have benefits and risks too.
Home Equity Loan Guide
A home equity loan is a type of long-term loan. It is used to finance the purchase of a new home in which the borrower uses the equity in their home as collateral.
The loan amount is typically based on a percentage of the home’s value. This type of loan is best for major expenses, such as home renovations, medical bills, or college tuition.
A home equity loan is a lump sum of money that is paid back over a set period, usually between 5-30 years. This type of loan typically has a fixed and low-interest rate, meaning your monthly payments will stay the same for the life of the loan. However, if you fall behind on your payments, you could lose your home.
Home Equity Line of Credit Guide
A home equity line of credit is a type of loan where you can borrow up to the maximum loan amount over the life of the loan. Loan terms are typically 5 to 10 years, depending on how you manage the loan.
The interest rate on a home equity line of credit is typically lower than that on a business line of credit and others, making it a more attractive option for borrowers. It’s generally tax-deductible with a variable interest rate based on the prime rate.
It’s typically repaid in minimum monthly payments, with the outstanding balance due at the end of the loan term. This type of loan is best for ongoing expenses, such as home repairs, or for covering a temporary shortfall in cash flow.
The drawback of this loan is the possibility of borrowers defaulting on the loan and losing their homes. If the value of the home declines, the borrower may find themselves owing more money than the home is worth.
The Right Loan For Me
Since you already know the difference between a home equity loan vs line of credit, the choice of what to apply to depends on how much you need and which process can help you the most.
A home equity loan is a lump-sum way that you can arrange how long you’re capable to pay the whole loan. While HELOC is like a credit card. You can borrow against it up to a certain limit and then pay it back as you please, as long as you make at least the minimum monthly.
Because you could lose your house, it’s essential to think carefully about which option is best for you.
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