Here’s what you should know about home equity loans and HELOCs.
There are two different loans you can get as a homeowner, using the equity in your home. It’s not so easy to understand the nuances between these different home loan options, so I wanted to explain home equity loans, home equity lines of credit, and the pros and cons of each. They’re both great ways to purchase a home. Not only do these loans have lower rates, but they also have higher borrowing limits than an unsecured personal loan.
A home equity loan uses the equity in your home as security for the loan. When you get the loan, the entire amount is deposited into an account. Most lenders consider giving loans that equal 85% of your home’s equity. The interest rate on these loans are usually fixed, and the interest payments are tax-deductible.
Most HELOCs have a variable rate, while home equity loans usually have fixed rates.
A home equity line of credit (or HELOC) also uses your home’s equity, but a HELOC is a revolving line of credit. You’re given access to an account with a specific limit, and you are charged interest only on what you use. The limit is also typically 85% of your home’s equity here. Interest payments on HELOCs may also be tax-deductible, but you should check with your accountant first.
There may be a limited amount of time where you can use HELOC money. If your window expires, you can apply for an extension. Most HELOCs have a variable rate, while home equity loans usually have fixed rates. If your HELOC has a variable rate, it’s important to ask these questions:
- What is the current variable rate?
- Which index is being used?
- What are the lender’s charges?
- How frequently will the rate adjust?
- Is there an interest rate cap/floor?
The big difference between these loans is how you receive the money. A home equity loan is given as a lump sum, while a HELOC is set up as a separate account that you can draw on as needed. I hope this explains the difference between these two different options.
If you have questions about this topic or anything else related to Triangle real estate, don’t hesitate to reach out via phone or email. I look forward to hearing from you soon.