These 3 questions can help you choose between a home equity loan and a HELOC
Many people have a lot of equity in their homes, either because they’ve paid off their mortgage balances or because property values ââhave increased dramatically over the past year.
Some homeowners may want to dip into their home’s equity and use that money to fund other things, like paying off higher-interest debt or financing home improvements. And if you’re one of those homeowners, you have two options for accessing your equity: a home equity loan or a home equity line of credit.
Answering the following questions can help you decide which option is best for you.
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1. Do you know exactly how much you need to borrow?
In some cases, you may want to borrow a specific amount of money for a specific purpose. In other situations, you may not be sure exactly how much money you will need from your lender.
If you have a set amount that you would prefer to borrow, consider opting for a home equity loan. This loan gives you a lump sum, and you cannot borrow more than that amount. You receive the borrowed funds all at once, start making payments after you get the loan, and know your exact repayment obligations in advance.
If you know you need to borrow but aren’t sure exactly how much, then you’d better have a Home Equity Line of Credit, or HELOC. This is because a HELOC allows you to borrow Up to a certain amount of money. You can borrow as little or as much as you want at any time, up to the maximum line of credit offered by the lender.
2. Will you potentially need to borrow more than once?
When you take out a home equity loan, you get all the money you borrow in one go. This works well if you want to take out a loan for a specific purpose. But if you prefer more flexibility, a HELOC might be a better fit. With a HELOC, you can borrow up to the maximum limit, and then as you pay back the amount you borrowed, the credit becomes available again. HELOC works much like a credit card – both are revolving lines of credit. But it usually comes with a much lower rate than a credit card.
3. Do you prefer a fixed or variable rate loan?
With a home equity loan, you usually choose a fixed or variable rate loan. If you prefer a fixed rate loan, this makes a home equity loan a better choice than a HELOC. A fixed rate loan offers more predictability, since your borrowing costs will not change.
HELOCs, on the other hand, are usually variable rate loans, so you risk a rate hike. You may be willing to take this risk to gain the flexibility that HELOCs offer, but carefully consider the answers to these three questions so you can decide which loan option is best for your situation.