HELOC & Home Equity Loan : They're Different !
If you own a home, you may be familiar witch the home equity line of credit (often called a HELOC). But perhaps you don't understand the difference between a HELOC and a home equity loan. Consider this the first step in determining what you need.
First, we'll tackle the difference between these two products. We'll start with the similarities: Both are secured loans, which means you're putting up your home as collateral for them once you borrow. Both offer fairly low interest rates, particularly right now, and allow for a tax deduction. And both require equity in your home. Essentially, these products are second mortgages: You're borrowing the equity in your home to use the cash.
The difference is that with a home equity loan, you receive a lump sum and pay it off on a monthly basis over a set period of time, generally between five and 15 years, although lenders may offer terms as long as 30 years. The interest rate and monthly payment will be fixed for the life of the loan. You may want a home equity loan if you need a large chunk of money at once, such as consolidating credit card debt (which is only a good idea if you trust yourself not to run the cards back up once you've cleared the debt off of them) or making home improvements, (which was the original purpose of this kind of loan).
A HELOC is a little more complicated. It's a pot of available money you can draw on as you need it. Similar to a checking account or, more accurately, a credit card, because you pay interest on the money you borrow. You'll be given a debit card or check book to access the money, and a maximum amount you can borrow, but you don't' have to use it all, and you won't pay interest on the portion you don't touch. The interest rate on a HELOC is generally variable, which means your monthly payment will vary as well. If you want some money in your bank in case you ever need it, such as an added emergency fund -- you may be a good candidate for a HELOC. They also tend to be a good fit for someone who has ongoing extensive home improvements, particularly if you want to borrow in increments over an extended period of time.
First, we'll tackle the difference between these two products. We'll start with the similarities: Both are secured loans, which means you're putting up your home as collateral for them once you borrow. Both offer fairly low interest rates, particularly right now, and allow for a tax deduction. And both require equity in your home. Essentially, these products are second mortgages: You're borrowing the equity in your home to use the cash.
The difference is that with a home equity loan, you receive a lump sum and pay it off on a monthly basis over a set period of time, generally between five and 15 years, although lenders may offer terms as long as 30 years. The interest rate and monthly payment will be fixed for the life of the loan. You may want a home equity loan if you need a large chunk of money at once, such as consolidating credit card debt (which is only a good idea if you trust yourself not to run the cards back up once you've cleared the debt off of them) or making home improvements, (which was the original purpose of this kind of loan).
A HELOC is a little more complicated. It's a pot of available money you can draw on as you need it. Similar to a checking account or, more accurately, a credit card, because you pay interest on the money you borrow. You'll be given a debit card or check book to access the money, and a maximum amount you can borrow, but you don't' have to use it all, and you won't pay interest on the portion you don't touch. The interest rate on a HELOC is generally variable, which means your monthly payment will vary as well. If you want some money in your bank in case you ever need it, such as an added emergency fund -- you may be a good candidate for a HELOC. They also tend to be a good fit for someone who has ongoing extensive home improvements, particularly if you want to borrow in increments over an extended period of time.
Labels: Financial Planning, mortgage
posted by Quark @ 4:05 PM
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