Home Equity Loans vs. Home Equity Lines of Credit: Which one is right for you?
August 11, 2022
Is a home remodel in the future for you? Perhaps there is another large expense coming up, like a child starting college. Maybe you just want to consolidate your debt at a lower interest rate, but are unsure how. A home equity might be just what you’re looking for.
What exactly is home equity? If you own a home, you have equity in it. Simply put, it is the amount your home is worth, minus the amount you still owe. The way to tap into that equity is to take out a home equity loan or line of credit.
What is the difference?
Home Equity Loan
With a home equity loan, the rate and term are fixed and you receive the full amount of funds that you were approved for upfront. You make monthly payments for the life of the loan, or until it is paid off. If you are planning for something and know exactly how much money you need, this would be a good choice. For example: you want to have an addition built onto your house and you already received a quote from a contractor.
Home Equity Line of Credit
If you’re looking for something that would give you a little more wiggle room, consider a line of credit. A home equity line of credit (or HELOC) is an open line that you can draw funds from at any time. Similar to a credit card, the amount you are approved for is the limit of what you can borrow, but you don’t have to borrow it all. Your monthly payment amount is based off of the funds that have been borrowed, so that can change month to month, and interest rates are subject to change with the market. At Webster First, we offer endless lines which means there is no term limit and you can keep the credit line open forever. Maybe you want to have some extra money in case of an emergency, but have no plans to use it just yet. Our HELOCs have no requirement to carry a balance, so you can leave it at zero until you need it.
Why apply for home equity?
Home equities typically offer greater lending amounts and lower rates than personal loans or credit cards. There are many reasons someone may want to tap into the equity of their home. The most common reasons are to consolidate debt or to pay for home improvement costs, however, you can use your equity in whatever way you’d like to.
Interest rates on credit cards are often much, much higher than what you would get on a home equity. Depending on your credit, a credit card company could charge you anywhere between a 15-30% interest rate, while a home equity will typically fall somewhere below 10%. So consolidating your debt with a home equity is going to save you a lot in the long run. That’s more money for your personal savings, more money for your gas and groceries, and more money for fun. This calculator can help you determine exactly how much you could save by consolidating your loans or credit cards.
Making home improvements will make the value of your home greater. You can sell it for a profit, or build your dream home and have even more equity in it. Some examples of home improvements we’ve seen equities used for are:
- Kitchen renovation
- Bathroom remodel
- Build a deck
- Replace a roof
- Pave a driveway
- Add an in-ground pool
- Finish a basement
- Replace windows
Other uses for home equity
Other reasons we see members tap into their home’s equity include, but aren’t limited to:
- Taking college courses
- Paying for a wedding or honeymoon
- Buying a vacation home
- Adopting a child
- Making a down payment on a vehicle
- Funeral expenses
- Money for holiday shopping
- Access to emergency funds
Your reason is also what will help you decide which choice is best for you.
How do I know which is best for me?
As we mentioned before, a home equity loan is a good choice if you know exactly what your budget is. It is also beneficial if you’d like to lock in your interest rate. If you’re consolidating debt with a lower rate, locking into a fixed would save you from those higher interest payments in case the market changes and rates go up.
If you’ve received a quote for a project but think you may risk going over budget, you might want to consider a HELOC. You can be approved for an amount higher than your quote so that extra funds are available to you just in case some unexpected expenses arise. For example: someone who is in the middle of a bathroom remodel rips out their walls to find they have a mold problem that now needs to be fixed! You never know what’s going to be behind those walls. A HELOC is a great choice for someone who wants to have money readily available to them for any large expenses that may come up, with no term limit.
We’re here to help
Empowering members with the tools to make the best financial decisions is a part of our core values here at Webster First. Our loan officers are excellent advisors that can listen and help you choose the best option. When you open a home equity with us, Webster First pays 100% of the closing costs on loans of $15,000 or more, and our home equities have no late fees.