Home equity line of credit (HELOC) and home equity loan: If you’re a homeowner, chances are you’ve heard of these lending products, but how much do you really know about them? Let’s start with the basics: Both the HELOC and the home equity loan enable you to borrow against your home’s equity – the value of your home minus any outstanding mortgage or other lines. But, which is best for you? Here are some facts that can help you decide.
What they both offer you:
- The ability to borrow against your home’s equity. While how much you can borrow may vary slightly based on your financial institution, you can typically borrow up to 80 percent of your home’s value, minus your outstanding mortgage.
- Attractive interest rates. Because each is secured by your home, both the HELOC and the home equity loan typically come with interest rates that are lower than other types of personal credit, such as personal loans or credit cards.
- Purchase flexibility. One of the best things about these products is that you can use them for virtually anything. From home improvements and debt consolidation to college tuition and your dream vacation, these flexible funds work for you.
- Potential tax advantages. You may be able to deduct the interest you pay on your HELOC or your home equity loan, which can help you save come tax time. Discuss your options with your tax adviser to determine if you may qualify.
How they’re different:
- Access to your money. A HELOC is a revolving line of credit, which means that your line—how much you can borrow—gets replenished every time you pay off the principal amount. This is a great option if you believe you’ll have many expenses over an extended period of time. Conversely, a home equity loan is similar to most loans in that you are approved—and responsible—for one fixed, lump sum. This makes them ideal for one-time expense scenarios, like tuition or a vacation.
- Fixed vs. variable interest rates. HELOC interest rates are typically variable, meaning they can decrease or increase (up to a pre-set cap) over the life of the line. Home equity loan interest rates are fixed, so you have peace of mind knowing exactly what your payment will be every month.
- Your monthly payment. But because you’re receiving your home equity loan in one lump sum, you will be paying interest on the entire amount. With a HELOC, on the other hand, you only pay interest on the amount of the line you use.
- Closing Costs. While closing costs vary by lender, HELOC’s are typically much lower than those of home equity loans (which can range from 2- to 5-percent of the loan amount) and are usually just a flat origination fee. To avoid fees, look for a lender that offers no closing cost options or fee waivers, like Suffolk Federal.
Now that you understand the similarities and differences between HELOCs and home equity loans, it’s time to put your home’s equity to work for you. Contact a knowledgeable Suffolk Federal team member or visit your local branch to get started.