Tapping into your home’s equity by taking out a loan is a major financial decision. Two main options exist – home equity loans and home equity lines of credit (HELOCs). This guide examines the key differences to help you decide which lending product best fits your needs.
Home Equity Loan:
– Fixed amount loan taken in one lump sum
– Fixed interest rate and fixed monthly payments
– Typically 10-15 year repayment terms
– Requires good credit
– Closing costs of 1% – 5%
HELOC:
– Revolving line of credit with variable withdrawal limits
– Variable interest rate fluctuates with market rates
– Interest-only payments during the draw period
– Typically 10 year draw period, 20+ year repayment
– Lower closing costs, annual fees apply
Ideal Home Equity Loan Uses:
– Major home renovations
– Consolidating high-interest debt
– Large purchases
Ideal HELOC Uses:
– Accessing funds as needed over time
– Keeping an emergency fund
– Lowering monthly payments
FAQs:
Q: Which has a faster approval process?
A: HELOCs can be approved within days while home equity loans may require 1-2 weeks.
Q: Which option has lower rates?
A: Fixed home equity loans historically have had lower rates than HELOC variable rates.
Q: What credit score is required?
A: You’ll typically need a 660+ FICO score for either option. Higher scores get better terms.
Q: Which is riskier?
A: HELOCs carry risk of increasing variable rates over time. Home equity loans have fixed predictable payments.
Evaluate your timeline, budget and financial needs to choose the equity tapping option that best aligns.