When looking at line-of-credit options and home equity loans, it’s important to understand that the main difference is the feature.
A home equity loan is a single disbursement that requires a fixed payment. A home equity loan is usually a fixed rate.
A home equity line-of-credit, or HELOC, is usually an adjustable rate loan because you can borrower the money anytime in the draw period.
A line-of-credit allows you to borrow only the money you need and offers a variable interest rate that is generally lower than fixed loan rates. Your payments will vary depending on the outstanding balance. Whether you want to consolidate debt or make renovations to your house, these refinance programs are a great option.
Similarities between the two:
Both a home equity loan and HELOC uses the borrower’s home equity as collateral. It does not replace the first lien mortgage, and instead, it takes a second position. Generally, you can only borrow up to 75 to 80% of the loan-to-value ratio in your home. This means that if your current first lien mortgage is at 80 percent of the home value you may not qualify. However, if you owe 60 percent or less of the value of your home on your current first lien, you may be able to borrow another 20 percent of the value through a home equity loan.
Home Equity Loan vs. Line of Credit:
One of the benefits of a HELOC over a home equity loan is that you are only charged interest on the money you borrow, whereas a home equity loan will give you a lump sum of money and charge interest on all of it when it is first disbursed, similar to an auto loan.
HELOC functions much like a credit card, with a maximum amount that you can use over a period of time, and you can borrow against that amount as you need money. When it is approved you can access a portion of the credit line at any time. With a home equity loan, you take the amount of the loan as a lump sum.
A HELOC may be more suitable for those who have borrowing needs that vary, where the total cost is unclear. For example, you may be in the process of remodeling your home and know you will need additional funds overtime. But, if you are using the loan to replace a roof, for instance, you will know the total cost up front and might find a home equity loan more suitable.
Chelsea State Bank offers both loan types, home equity and HELOC. We can guide you to the best loan type.
If you are comparing home equity loans vs. a line of credit, we can help you figure out which loan suits you best. Simply call us at 734.475.4210 or start your Home Equity Line of Credit today.
