You might have heard of HELOC loans or home equity loans. It is just a loan secured by your home. Although there’s a lot to know about home equity loans but we have taken it upon ourselves to discuss that in this guide.
What is home equity?
Home equity is the current value of your home minus any outstanding loans also known as your mortgage. In other words, it’s how much you truly own of your home. The rest of these is how much the bank owns that is, how much you took out for a mortgage.
One thing you need to know is that your home equity increases as you pay off your mortgage.
Home Equity Loan VS Home Equity Line of Credit
Home equity loans and home equity lines of credit are two different loan options for homeowners in case you don’t know.
A home equity loan also called a term loan, is a one-time lump sum that is paid off over a set amount of time and with a fixed interest rate on the same payments each month.
The loan can be thought of as a second mortgage unless the borrower space out payments over a long length of time. It depends on how much home equity you have to qualify for a large loan with a low interest rate whilst using your house as collateral.
It should be noted that a home equity line of credit (HELOC) works exactly like a credit card allowing you to borrow up to a certain amount for a time limit set by the lender. Throughout that time, you may withdraw money as you may need it and as you like.
It is possible that you can get a much larger line of credit with your home equity. Credit cards can offer lines of credit up to $15,000, whereas HELOCs can offer up to $50,000. certainly, your credit history, equity, income, among other factors can decide how much you’ll receive.
HELOCs have variable interest rates meaning that it could easily fluctuate one way or the other due to macro-economic factors outside your control unlike home equity loans.
Which should you get?
If you’re aiming to finance a large project, have a set amount at the back of your mind, and don’t plan on taking another loan sooner, a home equity loan could be right for you. For instance, if you’re borrowing money to do some work on your home, you would be safe to get a home equity loan.
Home equity loans also have longer borrowing periods, with fixed interest rates giving you the chance to have a more structured payment plan.
Also, a home equity line of credit is best for those who need a revolving line of credit over a period of years. There are a variety of reasons you could get a HELOC over a regular line of credit.
A few of the reasons include:
Making improvements to your home
Like a home equity loan, borrowing money against your home and investing it back into fixing it up sounds better. HELOC could make a lot of sense for fixer-uppers that need a bunch of small improvements which will enable you to continue borrowing money when the need arise.
Consolidating high interest credit cards
HELOCs have low interest rates for the credit worthy. This means, using a HELOC to pay off credit cards with interest rates like 15 or 20 percent can help you pay off debt more quickly than a balance transfer.
A back-up emergency fund
One of the greatness of HELOCs is that they’re sort of like credit cards. Your money is there when you need it. Having it as an emergency fund just in case of unexpected expense could save you.
What kind of credit do you need to get a home equity loan?
Those with poor credit can get home equity loans and try to avoid HELOCs. However, it’s very important to know that your home will serve as the collateral if you can’t pay back the lender. Also, let’s say you are the type with poor credit, you may not get the greatest interest rate on your loan.
If you own more of your home than you owe on it, you’ll definitely be seen as a lower-risk candidate meaning that the loan amount or line of credit you’ll receive will be higher which gives another important reason to consider putting at least 20 percent down payment on your home when you buy.
When should you NOT use your home equity to take out a loan?
While HELOCs and home equity loans are a great opportunity for homeowners, there are a few times when they should be avoided. Some of these are:
If you’re planning on selling your house soon
If you’re planning to move and you might not be able to pay off your loan or line of credit quickly, you shouldn’t take out a home equity loan. This is because, before you move, all your debts on the house will need to be paid off.
If you need a last-resort loan
It’s important to have a re-think that you’re putting your home at risk by taking either of these two loans. If you can’t pay back the lender, your house could be taken from you and of course, you may not want that!
If you have poor spending habits
Using a HELOC to pay off credit card debt can be a good idea but not if you don’t address the reasons you got into debt in the first place. Before you can get out of debt, you need to deal with all your negative spending habits and come up with a way to avoid going into debt in the nearest future.
That’s all we think you need to consider before taking out a home equity loan. If you find this guide useful, don’t hesitate to share with friends!