Understanding Home EquityHome equity is the difference between your home’s current market value and the outstanding balance on your mortgage. It represents the percentage of the property that you actually own, rather than the amount you still owe to the bank. As you make payments on your mortgage, your equity will gradually increase. Alternatively, if your home’s value goes up due to property market fluctuations, you might build equity without paying down your mortgage. Either way, building equity can be financially beneficial down the line. One way to unlock your home equity is through refinancing, which means taking out a new loan at a different interest rate to pay off your existing mortgage. However, refinancing is not the only method to release equity.
HELOCs vs Home Equity Loans: What’s the difference?HELOCs (Home Equity Lines of Credit) and home equity loans are both popular methods of accessing the equity tied up in your home. However, they differ in how they work and how they provide access to funds. A home equity loan is a lump-sum loan that you receive upfront. Once you have received the funds, you will repay the loan over a set period of time, often with a fixed interest rate. A HELOC, on the other hand, is a type of revolving credit with an adjustable interest rate. Rather than providing a lump sum of cash, a HELOC gives you access to a line of credit which can be used as and when needed. HELOCs usually have a draw period where you can draw on the line of credit, followed by a repayment period where you’ll need to repay the amount borrowed.
Benefits of accessing equity without refinancingThere are many advantages to accessing your home equity without having to refinance. For one, refinancing can be a complex and costly process, involving fees and comprehensive documentation. By using a HELOC or home equity loan, you can bypass some of these complexities. Furthermore, taking out a loan or line of credit against your home’s equity allows you to keep your existing mortgage in place. Refinancing could mean that you lose your existing mortgage, and the terms and conditions you were happy with.
How to choose between a HELOC or Home Equity LoanWhen deciding whether to take out a HELOC or home equity loan, consider the following: Different methods: A home equity loan gives you one lump sum upfront, which you then repay over a set period. In contrast, a HELOC allows you to draw on your credit line as and when needed. Interest rates: Home equity loans often have a fixed interest rate, while HELOCs generally have a variable interest rate. This can make HELOCs more flexible, but can also make them riskier if interest rates rise. Make sure to weigh the pros and cons before deciding. Repayment terms: Home equity loans usually have a set repayment schedule, while HELOCs have more flexibility. However, both will come with interest and fees, so ensure to review the terms carefully.
Pros and Cons of Home Equity LoansPros:
- Fixed interest rate
- Predictable monthly payments
- Large lump sum upfront
- May be suitable for a large expense like a home renovation or debt consolidation
- May not allow easy access to credit as most lump-sum loans need to be repaid before additional funds can be accessed
- May have upfront fees such as appraisal, origination, and title search fees
- Interest charges will begin immediately, which could increase the total cost of borrowing
Pros and Cons of HELOCsPros:
- Flexibility to draw funds as needed from a credit line
- Interest charged only on the amount borrowed, not the full credit limit
- Lower upfront costs since many lenders waive appraisal, origination and closing costs
- Varibale interest rate, making it difficult to predict monthly payments
- May be unsuitable for large expenses or a one-off expense
- Risk of foreclosure if monthly payments are missed