Contrasting a HELOC with a Home Equity Loan

When comparing a HELOC with a home equity loan, you will come across many similarities. However, they both have their own unique advantages. For some people a HELOC is the best way to go, while others are better suited to home equity loans. To help you decide which route is best for you, here are a few facts about each type of loan.

HELOC

No fixed loan amount- With a HELOC, you borrow as much as you want, whenever you want. As long as you do not surpass your credit limit, you will be able to borrow at your discretion. If you have an open line of credit, you can just leave it sitting there and never pay anything. You only pay if you borrow the money.

No time limit- With a HELOC, you pay off the loan at your discretion. If you don't pay it off, the interest charged just adds on to the balance. In this regard, it is like having a credit card with much lower interest.

Higher interest- Compared to a home equity loan, you can pay a slightly higher interest rate. In some cases, you will even have a variable interest rate which changes based on the prime rate.

Home Equity Loan

Fixed loan- With a home equity loan, you are setting up a fixed loan. You are deciding on the front end of the loan how much you want to borrow. You will have to judge exactly how much you need and borrow accordingly. Once you take out the loan, you start making payments on the entire amount and the interest that you will be charged.

Fixed repayment period- The home equity loan will have a designated period of time that you will have to pay everything off. A typical time period is 10 years. If you make your payment every single month, you will have the entire balance paid off at the end of the loan. At that time, the loan is closed and you have no more account with them. A home equity line of credit could stay open for many years if you wanted it to.

Lack of flexibility- If you don't want to make a large payment every month with a HELOC, that is your right. If you want to lower your payment while in a home equity loan, you will be in trouble. You have a payment that you have to make every single month without fail.

Lower interest- In return for the lack of flexibility, you will receive a lower interest rate on the funds that you have borrowed. Therefore, if you want to save money on interest, this is your best option.

Common Traits

There are some common traits with both of these loans. You can deduct the interest paid on your income taxes which makes it superior to other forms of lending. You are also utilizing your home equity on both types of loans. Just consider the many subtle differences before you make a decision on which route to take.

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