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Home Equity Loan or Home Equity Line of Credit: Which Loan is Right for You?


By: Envista

Home Equity Loan or Home Equity Line of Credit: Which Loan is Right for You?

With home prices climbing, the equity in people's homes is also rising, opening up the possibilities to leverage that equity through financing. Home Equity Loans and Home Equity Lines of Credit (HELOC) are two means by which individuals tap into the value of their homes, yet the nuances of each can significantly impact which is the better fit for consumers. In this comprehensive analysis, we'll go beyond the basics to help you identify which of these tools might be the better choice for you, and why.

Understanding Home Equity Loans

A home equity loan is a fixed-term loan with a fixed interest rate that is secured by your home. The amount you can borrow is typically limited to around 85% of the appraised value of your home, minus your balance on your mortgage. These types of loans are a good option for homeowners needing to fund one-time expenses, like a home renovation or consolidating debt, who want the predictability of fixed rates and fixed monthly payments.

Benefits of a Home Equity Loan

  • Fixed Interest Rates: Home equity loans offer the security of knowing your monthly payment and interest rate will remain constant throughout the life of the loan.
  • Structured Payments: Knowing when your debt will be fully repaid thanks to a structured repayment plan aids in long-term financial planning.
  • Tax-Deductible Interest: In many cases, the interest you pay on a home equity loan may be tax-deductible, provided you use the loan to improve your home.

A Home Equity Loan Might be the Right Choice If...

  • You Prefer Predictability: If you need assurance that your payments won't rise unexpectedly, a fixed-rate home equity loan could be your ideal solution.
  • You Have a Specific Project in Mind: For those with a singular financial goal, like a renovation, the lump sum from a home equity loan may be more advantageous than a HELOC's flexibility.
  • You Want to Lock in Rates During a Time of Low Interest: In a rising rate environment, a home equity loan now could mean a lower cost of borrowing than a HELOC down the line.

Understanding Home Equity Lines of Credit (HELOC)

A HELOC operates similarly to a credit card, allowing homeowners to borrow against the equity in their homes. The key difference between a HELOC and a home equity loan is that a HELOC has a variable interest rate tied to the prime rate. With a HELOC, you also have the ability to draw money on an as-needed basis, up to a certain amount, during the "draw period" (typically 5 or 10 years). After the draw period ends, borrowers enter the "repayment period," and can no longer borrow against the credit line.

Benefits of a HELOCs

  • Flexibility in Borrowing: With a HELOC, you can borrow as much or as little as you need, when you need it, up to your approved credit limit.
  • Variable Interest Rates: This means your costs can vary over time, potentially leading to higher or lower payments based on the interest rate environment.
  • Interest-Only Payment Options: During the draw period, you may have the option to make interest-only payments, which can be an advantage for those looking to manage short-term cash flow.

A HELOC Might be the Right Choice If...

  • You Have Ongoing or Variable Expenses: For those with a series of upcoming, less predictable expenses, a HELOC's ability to draw funds over time may be a more suitable option.
  • You're in Need of an Emergency Fund: A HELOC can serve as an emergency fund that costs nothing until you need the funds, unlike a home equity loan which starts accruing interest from the moment it's taken out.
  • You Desire a Line of Credit for Potential Future Uses: If you want to have a safety net or line of credit available for a range of needs over many years, a HELOC is set up for such contingency.

Understanding the Differences Between Home Equity Loans and HELOCs

The biggest difference between a home equity loan and a HELOC is the interest rate. Home equity loans offer fixed payments and rates, while HELOCs provide more variable terms. Here's a look at some additional differences you should consider:

  • Interest Rate and Payments: Home equity loans offer the security of predictable monthly payments and interest rates. HELOCs, however, can introduce uncertainty with variable rates and the potential for interest-only payments during the draw period.
  • Draw Period and Access to Funds: HELOCs provide flexibility to borrow multiple times throughout the draw period, possibly taking advantage of a lower debt-to-income ratio. Home equity loans provide a lump sum payment at the start of the loan, which can be beneficial for projects that have a fixed cost.
  • Decision Factors: The optimal choice between home equity loans and HELOCs will largely depend on the purposes of the loan and your financial situation. For example, if you can't accurately estimate the amount of home renovation that will be needed, a HELOC may provide the flexibility to manage costs through the project's lifespan. On the other hand, if you have clear needs and a desire for a structured debt payoff, a home equity loan may offer the best fit.

Making the Right Choice

In the end, the best option between a home equity loan and a HELOC is highly personal. Several crucial factors need to be considered when making a final decision.

Financial Discipline

With a home equity loan, there's no temptation to borrow more than you need or to keep money outstanding longer than necessary. The structured payments help enforce disciplined repayment. A HELOC, however, requires robust self-discipline to avoid overspending as a result of its flexibility.

Interest Rate Environment

Considering the duration of the loan and the state of current and projected interest rates is key. If rates are low and forecasted to rise significantly, a HELOC's variable rates can put you at risk of paying more over the long term. On the other hand, in a high-rate environment, the short-term nature of a HELOC and potential for falling interest rates can become a desirable option.

Loan Purpose

Your reason for borrowing might be the biggest factor in deciding which loan is right for your circumstances. If the need is immediate and known, a home equity loan may be the answer. For less defined or long-term needs, such as educational expenses or ongoing medical costs, a HELOC's flexibility may be the right choice.

Debt Tolerance

HELOCs' variable interest rates can introduce an element of risk for borrowers who are less comfortable with fluctuating costs over time. A home equity loan's fixed rates offer an alternative that eliminates that risk.

Tax Implications

Tax laws can change, but at current standards, the interest paid on a home equity loan is tax-deductible if the loan is used to improve the property. HELOC interest might be deductible as well, but under stricter qualifications.

Existing Mortgages

Your current mortgage structure can impact the choice between a home equity loan and HELOC. If you have a low interest rate on your primary mortgage, adding a home equity loan with a higher rate might be less beneficial than using a HELOC as a secondary line of credit.

Take Advantage of Envista's Low Home Equity Loan Rates for a Limited Time!

Envista is leading the market when it comes to home equity loan rates. As home values continue to increase, so does the untapped equity in your home. For a limited time, we're offering rates as low as 6.99% APR to help you achieve your financial goals. Whether you're looking to make home improvements, consolidate debt, or plan your next family vacation, we have the resources to help you succeed. With predictable payments and flexible terms, a fixed rate home equity loan at amazingly low rates is one of the most valuable tools you can have as a homeowner.

Ready to get started? Reach out to us or get approved online today!