Choosing Between a HELOC & a HEL

Posted by Gary Hall on Jan 3, 2018 11:31:00 AM
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A major difference between home equity line of credit and home equity loan is how the money is distributed. They are both secured loans because your home is used as the collateral to back the loan. 

Home Equity Loan (HEL)

With a home equity loan, you receive the money you are borrowing in a lump sum payment. It generally comes with a fixed interest rate. 

Since it’s a lump-sum, one-time equity draw, a home equity loan is a good source of money for major projects and one-time expenses. The home equity loan payment plan is the same each month, and that makes it easier to factor into your budget. But remember: HEL loan payments are in addition to your usual mortgage payment.

Home Equity Line of Credit (HELOC)

With a home equity line of credit, you have the ability to borrow or draw money multiple times from an available maximum amount. A HELOC works more like a credit card. You are allowed to borrow up to a certain amount for the life of the loan – a time limit set by the lender. During that time, you can withdraw money as you need it. As you pay off the principal, your credit revolves and you can use it again. Unlike a credit card, a home equity line of credit will usually have a lower interest rate, but the rate is variable, meaning your monthly payment can rise or fall.

HEL vs. HELOC: it’s important to clearly understand the pros and cons. Consider the following when choosing between a home equity line of credit and a home equity loan.

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HOME EQUITY LOANS PROS AND CONS

  • Pro: A fixed interest rate, usually lower than a credit card.
  • Pro: Interest paid is usually tax deductible. You will want to check with your tax advisor.
  • Pro: A source of income for things like home improvements that can add value to your home.
  • Con: Tapping all the equity in your home in one fell swoop can work against you if property values in your area decline.
  • Con: You will now have a first and second mortgage

 

HOME EQUITY LINES OF CREDIT PROS AND CONS

  • Pro: Lower interest rates, usually lower than a credit card.
  • Pro: Pay interest compounded only on the amount you draw, not the total equity available in your credit line.
  • Pro: May offer the flexibility of interest-only payments during the draw period.
  • Pro: Interest paid is usually tax deductible. You will want to check with your tax advisor.
  • Pro: A source of income for things like home improvements that can add value to your home.
  • Pro: Con: With a variable interest rate, rising interest rates can increase your payment.
  • Con: Without discipline, you might overspend, tapping out the equity in your home and finding yourself saddled with large principal and interest payments during the repayment period.

Before deciding whether to apply for a home equity line of credit or a home equity loan, consider how much money you really need and how you plan to use it. Carefully weigh the pros and cons of each of these types of loans before tapping into your home equity.

At ChoiceOne Bank, our loan officers are ready to work with you. We can help you find the best rate available and the terms that best meet your financial goals. The good news is both of these secured loans, home equity line of credit and home equity loan, usually have lower interest rates than unsecured loans, like credit cards.

Call our Customer Service Center today at 888.775.6687 or visit any of our convenient branch locations to speak to a loan officer near you.

Find a location here: https://www.choiceone.com/contact-and-locations/.

You can also apply online at https://www.choiceone.com/personal/borrowing/ 

*Loans are subject to credit review and approval. Home Equity Lines of Credit are available for well qualified applicants for loans of $5,000 or greater. No annual fee for first year, then $50 per year. Processing fee of $199 may be applicable. Rate not to exceed 18.00%. Consult a tax advisor regarding the deductibility of interest.

Topics: Living in Grand Rapids, HELOC