If you’re thinking of doing some home improvements or need an emergency fund, there are a few loans that you can utilize. Two options in particular are the home equity line of credit (HELOC) and an a Home Equity Loan – both of these are provided using your home equity and are a great way to monetize the equity that you have built in your home. Both of these loans are secured by your home and therefore your borrowing capacity is a function of the market value of your home and how much of your mortgage loan you have paid off. These are common financial products offered by both banks and credit unions. Alaska USA Credit Union (AKUSA) offers its members both home equity loans and HELOCs. AKUSA describes a home equity loan as “a lump sum to be paid back in regular payments, over a specific term” and describes a HELOC as “a line of credit you can access any time, similar to a credit card”.
Home Equity Loan
A Home Equity loan is for a fixed amount of time and you’ll receive a specific amount of money based on the lender’s assessment of your home value, equity and creditworthiness. It will be based on the equity of your home and is often labeled as a second mortgage. When you apply for it, the amount you are approved for will depend on the size of equity you have accumulated on your property. You are specifically using this equity as a source of funds.
HELOC on the other hand is a revolving credit line, meaning you can take money against the credit line, make a payment, and take money out again. This is why AKUSA likened it to a credit card – it is a line of credit that’s available as needed. You are only responsible for paying interest on the amount of the line of credit that you have accessed.
Major Differences Between HELOC and a Home Equity Loan
A HELOC is useful if you want to do home improvements and increase the value of your home and need access to financing. It provides more flexibility to borrow money when its needed and you don’t need to pay unnecessary interest costs. However, you are in effect borrowing against the equity you’ve built in your home so you have to keep that in mind. The home equity loan is more stable and predictable and usually has a fixed rate of interest which helps with planning. That said, if you’re not sure about how much financing you need then the drawback of a home equity loan is that you will potentially be paying more interest than is necessary. In instances like this, a HELOC might be more convenient.
With either loan, you want to make sure that you don’t borrow more than you can pay back as you could literally lose your home if you are unable to repay the debt. Remember that ultimately your home and its market value is what the loan is based on, and because your property will be used as collateral it could be well within your lender’s right to start foreclosure proceedings if you fail to repay the debt.