To get funds for unexpected huge expenses, lines of credit and home equity loans are supposed to be the best options. Both these loans help the consumers to get access to huge amount of money against the equity in their homes. These unsecured personal loans are impressive due to the lower interest rates than the credit cards. Besides, the interest paid on the availed loan is tax deductible. Knowing the differences between the line of credit and the loan will help in determining the right choice for your needs.
The line of credit or the home equity loans!
Home equity loan is known as second mortgage and you can borrow a huge amount as per your needs which you are expected to repay over the term of 10 to 30 years. The borrowers can opt either for fixed rate or variable interest rate. Home equity loans are ideal for support when the borrowers need money for home improvements or for purchasing a new car. Around 80% of the home’s equity can be approved and the market value of the home is determined by an appraisal while applying for loans.
Home equity line of credit (HELOC) is the type of loan by which you can borrow money as and when you need up to the specified maximum limit. The interest rates are variable. While you are approved of the home equity line of credit, the borrower is given a credit card or checks to use whenever he needs to draw against his line of credit. A home equity line of credit is divided into the draw period and the repayment period. During the draw period, the line can be utilized actively and during the repayment period, the borrower starts to repay the amount borrowed. Mostly, the payments will be only the interest during the draw period and the principal is repaid during the repayment period. During the repayment period, the monthly payment could be higher and may even be a balloon payment by the maturity time. If the borrower pays off the principal amount during the draw period, he can borrow repeatedly till the draw period ends.
Flexibility is a great benefit in a home equity line of credit. The funds availed can be used for any purpose as in home equity loan. It is a good option for those who intend to renovate their homes. The funds can be used for the settlement of medical bills and for college tuition. Both in line of credit and home equity loan, the collateral is the house of the borrower. It becomes very important to know the terms of the loan before deciding on the plan. You should make an exact calculation and borrow just the amount that is needed and that you can repay without stress.
A huge amount of loan is possible with home equity loan and the entire loan amount is offered to the borrower as soon as the process of sanctioning the loan gets over. In the line of credit, the amount can be withdrawn when and where the necessity arises. The interest on the home equity loans is tax deductible and this is not the case with the line of loans for people with bad credit. So, it is always a better choice to go for home equity loans to save on interest rates and to enjoy better benefits.
How can you use home equity?
If you feel HELOC resembles a credit card, then you may think that a home equity loan is more or less similar to the original home mortgage. You can borrow a specific amount, and then you can make regular payments during the fixed and decided repayment period. For that, you home can qualify for being the most valuable asset, and if you decide to borrow against the equity, you will have access to freeing up the cash for any of the several purposes. Indeed, there are many areas where you can use the money like:
How about financing a home improvement project?
Do you know, under the recent tax law, the interest on a HELOC or a , which is used to buy, build and substantially improve the home can be counted in the categories of being tax-deductible? For this to realize in the reality, you can consult your tax advisor.
It can also be used to consolidate whatever you own on your credit cards and or the higher-rate debts on a single loan. Since you have opted to use your home as collateral, so you will find that these loans will have a lower interest rate than the other kinds of loans.
Similarity and differences
Both the methods, that is the line of credit, and home equity loans allow you to borrow amount against the appraised value of your house. It may be the case where you want a solid cash inflow when you need it. If we put it simply, here is what it means to draw the difference between the two options.
Home equity and a loan can mean different things, and hence they can help you figure out whether they are the right things for you. For instance, if you have built up equity in your home, it can be considered worth more than the mortgage for you. Now, you may be wondering why it is said so, right?
It is because you may be able to use part of that money value to meet financial needs. They can be anything like cash for home improvement projects, used to pay your unexpected costs and the education expenses also. So, you see the home equity lines of credit (HELOC), and home equity loans are two similar things destined to meet the same end.
What is right for you, home equity loan or home equity line?
It is rightly said that the home equity line of credit gives you the flexibility of a financial backstop, yes, you can find it there when you need it! If your tuition fees come up all at once or your roofs need repair, or in the worst-case scenario, you can draw from the home equity line of credit if you are out of cash. And, remember, this is the most easiest solution for you at the moment of need! We call it flexible because we decide when to use the funds and you have to pay the interest only on the money that you have used.
On the other hand, if you are considering the home equity loan, you will have access to a lump sum of cash at loan closing, and you will be able to know about your monthly payments will be. Also, you will know about the total time you will be taking to pay off the total loan.
Well, either case you choose, the amount of money you will be able to borrow will largely depend on the value of your home, and the amount of equity you have available at that time. So, it is advised that with both, you must be using your home as collateral. And, interestingly, make sure the value does not drop for your home. Because it could be at risk if its value drops or there is any interruption in your home.
The final word
Whether you qualify for the HELOC or the , make sure your financial situation is stable enough to have the repayment period passed on the smoothest parts. In either case, both the loans can be helpful and a cost-effective tool for making the most out of your home value.