Home Equity Loans and HELOCs – Which is Best for You?

Posted by wadmin on Thursday, March 21, 2019

Two useful tools for borrowing against your home’s equity.

Homeowners in need of cash may want to consider taking out a home equity loan or a HELOC. Both are commonly referred to as a second mortgage and allow you to borrow against the value of your home. If you find yourself looking at a remodel for your home or you need to do some pricey repairs, these types of loans are incredibly useful.

Why choose a second mortgage over a different type of loan?

There are many types of loans out there that you could take if you find yourself in need of extra cash now. However, homeowners have a unique benefit in being able to utilize your home’s equity. Home equity loans and HELOCs both typically have lower interest rates than other types of loans. If your only other options are personal loans or credit cards, then these loans are the better choice. Since second mortgage loans also use your house as collateral, they may be easier to qualify for. Additionally, there are no limits as to how you’re allowed to use the money you get from a home equity loan or a HELOC. While of course it is not recommended to use said money frivolously, it is extremely useful if you need to remodel or repair things around your home.

But which would work best for you — a home equity loan or a HELOC? Both loans let you borrow against the value of your home, but they don’t function the same way. You must familiarize yourself with each before you can know which is best for you.

Home Equity Loans

These loans come with a fixed interest rate, fixed monthly payment, and fixed repayment timeline. Because they are more predictable, home equity loans are the preferred option for borrowers who don’t like surprises.

The fixed interest rate and repayment term means that your payment amount month by month will not change unexpectedly. You know exactly how much you’re borrowing, what you’ll pay back, and how long it will take.

The amount you borrow is determined by your loan-to-value ratio. This calculation takes into account your home value minus your existing mortgage and limits your loan to about 80% to 90% of that balance. If you qualify, you will receive the funds in a lump sum.

Double check with your lenders to see if there are any payment penalties. If you think you may want to pay off the loan early, you’ll need to know what they penalize you for and how much. Different lenders have different fee rates, so it’s useful to compare lenders before deciding on one.

To sum up:

Pros

-Fixed monthly payment, loan term, and interest rate

Cons

-Because your home is used as collateral you risk foreclosure if you don’t repay
-Some home equity loans have fees, including an origination fee and closing fees
– You are required to figure out how much you want to borrow up front

HELOCs

HELOCs, unlike home equity loans, come with variable rates and let you borrow as you need. These loans function a lot like a credit card, with the biggest difference being that you’re using your home as collateral. Borrowing as you need means you will only pay back what you borrowed in the first place.

HELOCs also limit the amount of money you can take out. The lending rate is usually up to about 85% of your home’s value. This may more may not include fees to the lender. The interest rate for HELOCs is variable and based on an index. Some lenders may allow customers to convert these to fixed rates.

HELOCs tend to come with set borrowing and repayment periods. The borrowing period is usually about 10 years, and the repayment period is about 20 years. You are only allowed to take out money during the borrowing period. Remember that your payment is based on how much you borrow, and your interest rate is variable. This means that tour monthly payment amount may be hard to predict and could even fluctuate over the course of your loan.

To sum up:

Pros

– Only borrow amounts you need instead of a lump sum
– Your variable rate could remain low since it’s based on an index
– Many HELOCs come with no fees or low fees

Cons

– Because your home is used as collateral you risk foreclosure if you don’t repay
– Some HELOCs require a large balloon payment or lump sum at the end
– Some HELOCs have fees, including an origination fee and closing fees
– Your monthly payment can vary based on your interest rate and how much you borrow

In the end, only you can decide which, if either, of these options is right for you.

Stonebridge Mortgage Group can advise you on your mortgage needs.

For professional assistance with your mortgage, look no further than Stonebridge Mortgage Group. You can rely on Stonebridge Mortgage Group to help guide you through the entire home buying process. If you’re ready to apply for a loan and want to go through the process online, Stonebridge Mortgage Group offers online applications. We also help get you pre-approved for a mortgage and help with your real estate loans and other mortgage solutions, both residential and commercial. Stonebridge Mortgage Group serves the greater Portland area and are in Gresham, Oregon. Don’t wait to get quality assistance with buying your home!