Home Equity Loan and Home Equity Line of Credit

Difference Between Home Equity Loan and Home Equity Line of Credit

Both home equity loan and home equity line of credit (HELOC) have their advantages, but the key is understanding the difference to choose one that better serves your wants and needs. The key difference between the two is that you get a lump sum amount of money in a home equity loan and have to repay the debt at a fixed interest rate. On the contrary, a home equity line of credit allows you to borrow money in bits and chunks as you need it up to a maximum preset credit limit. The repayment of the debt is also usually made at flexible interest rates.

The repayment period of a home equity loan starts as soon as you borrow the money, and you have to repay the principal combined with the fixed interest each month. However, HELOC has a period, usually ten years, up to which you can draw any amount of money, not exceeding the maximum limit, whenever you want and pay only the interest during that period. The interest rate is based on the prime rate, fixed by the Federal Reserve, and keeps changing. But as soon as the drawing period is over and you enter the repayment period, you have to start repaying the principal combined with the interest for all the borrowed money. The principal amount stays the same, but the interest is variable during this period, too, resulting in a constant change to the total amount you pay.

How to Apply for Home Equity Loan or Home Equity Line of Credit?

Different lenders have different criteria for the qualification of home equity loans, and it is best to check for details with your lender. But we will discuss the general steps and requirements of most of the lenders.

Requirements:

• You must have at least 15% to 20% equity in your home. It means the value of your home has to be 15% to 20% higher than your current mortgage loan amount.
• You must have steady employment or a record of steady income. Evidence through pay stubs or tax records is required.
• Your debt-to-income ratio should be lower than 50%. Although a ratio below 43% is ideal.
• Your FICO credit score should be above 620.

Choosing a Lender

Choosing who to borrow money from is an important step. The response rate, qualification criteria, and the required steps may vary from lender to lender. It is always best to take some time and look for options before comparing them. If your credit score is not healthy, some lenders have policies showing some leniency towards it. Always compare your needs and financial situation with all the available lender options before choosing one.

Application

After you decide on a lender, you will be required to apply for the loan formally. You will be expected to submit a few documents and the application and have to answer some questions about your income, debts, and property. The documents usually include:

• Proof of your household income
• Mortgage statement
• Property tax bill
• Homeowner’s insurance policy
• Documents of any other outstanding balances

The lender will also ask for your social security number, and other documents may also be required depending on your monetary situation as the application process moves forward.

Property Evaluation:

Your lender may require you to get a property evaluation of your home by a certified appraiser.

Underwriting:

An underwriter will compare your home equity loan requirements to your financial profile by examining and assessing your borrowing history and creditworthiness.

Closing:

After the lender is satisfied and approves your application, you will be required to sign the necessary paperwork and documents. The details of funds’ disbursement will be discussed and arranged.

Home Equity Loan – Advantages

A home equity loan gives you the benefit of knowing exactly how much to repay. The predictability of the repayment is useful and secure as you do not fear the rate of interest going up. If you know exactly how much money you want or need to borrow, a home equity loan might be the better option for you. Another advantage of a home equity loan is that you get the whole amount at once, and there is no fear of your lender cutting your credit limit or freezing your equity credit lines.

The interest rates of home equity loans usually have a lower interest rate than personal loans and credit cards. Refinancing is also an option where you can apply for a new loan with a lower interest rate. Then, you can use the funds to pay off your higher-interest loan.

Home Equity Line of Credit – Advantages

HELOC might be the right choice for you if you are looking for flexibility in your borrowing and repayment schedule. Up to a period of ten years, you can draw as much as you need and can repay it whenever you can. If the prime interest rate decreases, the interest on your repayment also decreases, and you can wait for that chance to repay your loan amount. Unexpected and unforeseen expenses are good to be borrowed and paid with a HELOC as it offers withdrawals as per your needs and charges interest on only the amount you borrow.

• In general, remember: A home equity loan is a great option if you need a one-time, large amount of cash.
• A HELOC is the right option if you need that large amount of money but might not need it in one lump sum.

We encourage you to contact Greater Alliance or another trusted financial institution to learn more about current offers and free pre-approvals, to help you plan in advance for those big expenses, and talk you through other options, such as a personal loan or a student loan if home equity is not the best fit.

Be sure to apply today. In no time, you will be checking off that next bucket list item, hassle-free!