Home Equity Loan & Line of Credit – A Detailed Comparative Look.
Home Equity Loan: You will agree with me that when it comes time to borrow money, options abound. People can go to a bank for a traditional fixed or variable-rate loan. Also, they can use credit cards to borrow.
It is important you know this. Some of these ‘borrowings’ are to improve the home. This is because, being a home-owner comes with responsibilities. These responsibilities includes paying property taxes. Also, it involves keeping up with maintenance. These are both inside and outside the home. These responsibilities may seem daunting to some.
However, when they are taken seriously, the value of a property is likely to increase over time. Also, for many, a home is their greatest source of wealth. But enjoying that wealth often means tapping into some home loan. There are two outstanding home loans. They are: Home Equity Loan and Line of Credit. This article carries out a comparable study of both. This is to help know which is preferable.
What is Home equity Loan?
This is a type of loan in which the borrower uses the equity. This equity is his or her home; serving as collateral. The loan amount is determined by the value of the property. Also, it is determined by an appraiser from the lending institution.
What is a Line of Credit (LOC)?
A line of credit (LOC ) is preset borrowing limit that can be used at any time. The borrower can take money out as needed until the limit is reached. Also, borrowers can take as money is repaid. Furthermore, it can be borrowed again in the case of an open line of credit.
It is an arrangement between a financial institution. It is usually with a bank and a customer. Also, it establishes the maximum loan amount the customer can borrow.
Home Equity Loan vs Line of Credit – Advantages
Home Equity Loan
It Gives you the Cash Right Away
When comparing Home Equity Loan vs Line of Credit, Please note. Home equity loan allows you to get cash right away. Some people agree that these funds should go back into your property.
This is to increase its value. However, some home-owners use it to pay for college. Also, they use it to clear away high-interest debt. Furthermore, some use it take care of emergency expenses.
It has a Better Interest Rate
A home equity loan gives you a better and fixed interest rate. This is typically lower than what a line of credit will provide. During Q1 2019, you could access a fixed APR with this lending product of 4.89%.
That is if you took out a second-position home equity installment loan of $50,000 to $250,000 in U.S. When comparing Home Equity Loan vs Line of Credit, Please note.
It provides a Fixed Payment Schedule
This is another advantage to consider with a home equity loan. Here, you are given the exact repayment schedule. This occurs from the moment you accept the terms.
That can make it a lot easier to budget this expense. This is so because it becomes a predictable component of your finances.
You don’t Need the Same Levels of Income Stability
When comparing Home Equity Loan vs Line of Credit, Please note. It ties directly to your property in a second position as collateral. As such, there is typically a higher approval rate. This is for those who have unpredictable or unusual streams of income
If you work as a self-employed individual, then note. It is usually easier to use a loan instead of a HELOC with your property. Also, if you own a business, or perform jobs as an independent contractor, then note. It is usually easier to use loan instead of a HELOC.
There is Fewer Tax Complications
After the passage of the Tax Cuts and Jobs Act, this is the case. You can no longer deduct the interest on a home equity loan. This goes through the 2025 tax year. That is if it involves equity indebtedness.
What that mean? It means, if you secure the lending product using your home and then use the funds to pay off a credit card or buy a new car, then you typically could not make an interest claim. This rule also applies to a line of credit.
Line of Credit (LOC)
It is Like a Secured Credit Card
When comparing Home Equity Loan vs Line of Credit, Please note. A line of credit works more like a secured credit card. It’s like where your home equity acts as the deposit.
You can draw as much as you want up to your limit. But then you are responsible to repay whatever amount you take. There is usually a draw period (of up to 10 years). Also, the line of credit freezes to become what is essential a home equity loan then.
Your Debt is Dependent on How you Use Your equity
When comparing Home Equity Loan vs Line of Credit, Please note. A line of credit does not always provide the same experience. This is especially if you are within the draw period of this lending product.
The monthly amount you owe depends. It depends on how much of your equity that you use. Many come with a variable interest rate during this time. Also, this means you could find yourself spending more. This can be each month to manage the debt.
It is usually Cheaper than using a Credit Card
House holds can appreciate the benefits of having a credit card. This is because of immediate spending needs. However, the only problem with a credit card is this. It usually carries a high APR. Thus, when comparing Home Equity Loan vs Line of Credit take note.
Some consumer cards have a standard APR of 29.99%. If you can be approved for a line of credit, then the interest rates are usually lower. They are lower than what you’d find with a similar credit card. You’ll have the same purchasing power. Also, you will be required to repay less over time.
It Reduces Temptation of Purchasing Unnecessary Items
From a consumer perspective, you should know this. The availability of credit on a credit card makes it a temptation to purchase items you don’t needed. Also, with its ease of use at the point-of-sale, you can buy recklessly.
From a business perspective. please note. The spending on a credit card is something that can have tax advantages. This creates a temptation to purchase items as well.
However, a line of credit is usually linked to a banking account. This reduces impulse purchases for most individuals.
A Line of Credit Makes Cash Availability Easier
When comparing Home Equity Loan vs Line of Credit, Please note. A line of credit can be processed in as little as 24 hours.
Even for larger credit lines, the turn around for a line of credit is usually a few days.
Home Equity Loan vs Line of Credit – Disadvantages
Home Equity Loan
Below are some of the demerits of Home Equity Loans:
You can lose your property through the fore-closure process. That is if you fail to repay your debt.
The closing costs of a home equity loan are more expensive than a line of credit.
You are stuck with the full amount if you choose a home equity loan.
Also, there are fewer long-term fees to worry about with a home equity loan.
It could be for more than the net worth of your house.
Also, you are creating another significant debt that you must repay
Line of Credit (LOC)
Below are some of the demerits of Lone of Credit:
A line of credit still has a higher interest rate than other lending products.
The fees for a line of credit vary widely throughout the industry.
Also, it operates under a different set of regulations.
Almost all lines of credit come with an adjustable interest rate.
Also, there is still the temptation to overspend with a line of credit.
Furthermore, it will almost always have a required minimum.
In a Nutshell
In summary. When comparing Home Equity Loan vs Line of Credit, Please note. Both are useful lending tools to consider when you are ready to unlock the value of your home.
Although there are risks to think about with either option. You will find that some distinctive rewards are available when using them.
The above comparison is important to consider if you are in a position right now where you must turn locked value into liquid capital. However, work with your preferred lender to find the terms that you can manage. Also, don’t forget to shop around to see if you can achieve a better rate.