Your home is not only the place where you reside; it is an investment worthy to be considered. Equity is the value of your home that is available to you as a borrower when you want to borrow some cash for any reason. Two examples of this are home equity loans, and home equity line of credit (HELOC). At Union State Bank, we want to explain the differences between these choices so you can make the best financial decision.
What Is a Home Equity Loan?
A home equity loan enables a borrower to borrow money, which is in the lump sum by using his house as collateral. This kind of loan bears a fixed rate of interest and has a set time in which the loan is to be repaid, this makes the loan highly sustainable for borrowers.
Key Benefits of Home Equity Loans:
Predictable Payments: Fixed interest rates guarantee a steady monthly instalment to be paid to the lender.
One-Time Funding:
Most suitable for large and specific expenses such as repair and improvement of a building, or paying off debts.
Long-Term Planning:
The structured repayment terms are another advantage because they assist to create a plan financially.
Home equity loans are selected when a homeowner wants a lump sum of money, and a fixed payment schedule.
What Is a HELOC?
A HELOC offers you the credit line and you can borrow cash in the course of the draw period, which ranges from five to ten years. HELOCs are different from home equity loans in that they have adjustable interest rates meaning that the rate charged can change over time.
Key Benefits of HELOCs:
Usability:
Get only the amount that you require and at the time you require it.
Pay Interest Only on Amount Used:
No charges for unused credit.
Ongoing Access:
Credit to be used again during draw period without the need to reapply.
HELOCs are ideal for those homeowners who have unpredictable expenses or those who wish to borrow on a piecemeal basis.
Key Differences Between Home Equity Loans and HELOCs
- Repayment Structure:
Home equity loans have fixed payments, while HELOC payments depend on the amount borrowed and interest rates.
- Interest Rates:
Home equity loans offer fixed rates, while HELOCs usually have variable rates.
- Disbursement of Funds:
Home equity loans provide a lump sum, whereas HELOCs allow for borrowing as needed.
Choosing between the two often depends on whether you prefer financial stability or borrowing flexibility.
When to Choose a Home Equity Loan
A home equity loan is suitable if:
- You have a small, multiple expense for example, rent or salary.
- High monthly payments and fixed interest rates are important to you.
- You like debt that is accrued for a long-term financial plan and which has a well understood term of payment.
Example:
If you’re thinking of doing a renovation on your kitchen then the home equity loan is best for you since it has a fixed rate and the money is disbursed in full.
When to Choose a HELOC
A HELOC is the better option if:
- You require consistent cash for one or the other purpose, including home improvement projects or other expenses.
- They are at ease in relation to variations in amounts to be paid every now and then per month.
- You would like to pay only interest on the amount you draw down.
Example:
If you are going to do different small repairs around the house in the following several years, a HELOC allows you to take credit as needed.
Potential Tax Benefits
The interest paid on home equity loans or HELOCs is only tax-deductible if the money borrowed is used to make improvements on the home. Check with a tax professional or go to the IRS website for specifics on who qualifies.
Introduction to the Home Equity Loan or HELOC
At Union State Bank, our application process is simple:
- To determine your home’s equity, you need to subtract the remaining balance of your mortgage to your home’s current worth.
- Review your situations and decide whether you need a cash loan or a line of credit.
- Please reach out to our team to find out more about your options, and to begin the process of the application.
Bottom Line
Home equity loans and HELOCs are two forms of credit that can be very useful but if stuck between the two, it is essential to make a decision depending on the requirements of the borrower. Whether you are looking to lock in a fixed payment or you like the ability to revolve a credit, Union State Bank is ready to help.
Please go to our Home Equity Loan page or feel free to call us to talk to a financial specialist right now. Combined, we will assist you in getting the most out of your home’s equity.