Home Equity Loan or Line of Credit?

Home equity loans and lines of credit offer members the ability to leverage the equity in your home to fund projects or purchases at highly competitive rates. With rates rising, refinancing your mortgage for cash-out is not as appealing as it was even a year ago. So what are the differences between a home equity loan and a home equity line of credit (HELOC) and why are they good alternatives to refinancing your mortgage?

To answer that, let’s first look at how what home equity loans and HELOCs have in common. Both use the equity in your home as collateral for the loan. That means you get a lower rate and will spend less money on interest than you would with an unsecured loan. Your home’s equity can grow either by paying down your mortgage or by your home’s value increasing. Home equity loans and HELOCs both require an appraisal to determine the current value of your home, however most appraisals do not require a review of your home’s interior. Lastly, both loan types have a right of rescission period after signing your loan documents. Because these types of loans are typically substantial commitments the rescission period allows you time between signing and funding to change your mind without penalty.

Now, let’s look at their differences. Home equity loans are a one-time, lump sum advance. That is typically useful for projects or purchases that you know the total amount you need to finance. HELOCs are a line of credit. That means you’re approved for an overall amount, but you don’t need to take all of that out at once. HELOCs can be useful when you don’t know the final amount you’ll need to borrow. It also allows you to advance more money during the draw period, which is typically five years.

Another big difference is that home equity loans are a fixed rate. That means your payment and rate will stay the same even if rates go up in the future. HELOCs are a variable rate, which means your payment and rate may increase or decrease depending on the current rate environment. However, you only pay interest on the amount of the HELOC you have advanced, not the overall credit line.

Both home equity loans and HELOCs have a different advantages depending on your situation. Our loan officers, Diane and Linda, are happy to discuss those with you to determine what works best for your needs. Diane and Linda can be reached by calling 515-348-8350, option 3 or by emailing caploan@capview.com.