Home Equity Loan versus a Home Equity Line of Credit (HELOC) — two financial solutions that sound very similar yet have very different pros, cons, and considerations. While Sierra only offers one of these solutions – HELOCs – we believe that knowing the difference and making informed financial choices is key.
So, how do you know if a HELOC or a Home Equity Loan is right for you? Allow us to give you the breakdown!
How are they similar?
Home Equity Loans and HELOCs are both based on your home’s equity. If you’ve owned your home for a few years, you’ve likely built up some equity, and you can estimate this equity by subtracting the amount of money you owe on your mortgage from your property’s value. The amount you can borrow in a Home Equity Loan or a HELOC is dependent on this equity.
Home Equity = Property Value – Amount Owed on Home
Because both solutions are based on your home’s equity, they often come with lower interest rates than other types of loans. This makes them great solutions for borrowing money, especially when you have big expenses on the horizon. Many people use these solutions for home renovations, education expenses, vacations, medical bills, credit card consolidation, and more.
How are they different?
Home Equity Line of Credit (HELOC):
Opening a HELOC gives you access to a flexible line of credit. Like a credit card, you can draw funds from this line as needed. Most of the time, the interest rate on a HELOC can fluctuate with the market, meaning your monthly payments aren’t set in stone. Some months, your payments might be higher or lower. The good news: you only pay interest on the amount of money you draw from the line. This way, you have more flexibility in repayment.
A HELOC is a great solution:
- If you don’t know how exactly how much you need to borrow.
- If you have a project or future expense in mind but you don’t know how much it will cost you yet, a HELOC allows you to borrow only what you need, when you need it.
- If you want flexibility in repayment.
- You only pay interest on the amount you borrow, so you can pace out your payments based on when and how much you borrow.
- If you have upcoming expenses but uncertain timelines.
- For example, if you know that college tuition is on the horizon but aren’t ready to borrow yet, a HELOC can give you that safety blanket. A HELOC can also keep you covered for unexpected medical bills or other surprise expenses.
Home Equity Loan:
Note that Sierra Pacific doesn’t currently offer this type of loan.
The funds from a Home Equity Loan are distributed to you in a lump sum at a fixed interest rate. This means that you will receive the entirety of the funds at once and have the same payment each month. This fixed interest rate can be beneficial if market rates are on the rise, but keep in mind that the rate you receive typically depends on your credit score, payment history, and income.
A Home Equity Loan is a great solution:
- If you have a higher credit score.
- A Higher credit score results in a lower interest rate
- If you are likely to overspend.
- Fixed payments and one lump sum create good guidelines.
- If you have a specific project or expense in mind.
- Knowing how much money you require for the project helps you determine how to use the lump sum.
- If your property values are unlikely to decline.
- Property values aren’t set in stone. If your home’s value decreases, you might end up owing more than your property is worth
The best solution for you might not be the best solution for someone else. Our team can help you determine whether a HELOC (or an entirely different solution) is best for you!