You’ve probably heard of a home equity loan or home equity line of credit (HELOC), but the differences and similarities can be confusing. We’re here to define a home equity loan vs. line of credit and help you figure out which one is best for your goals.
What Is “Home Equity”?
Choosing the loan option that’s right for you starts with an understanding of home equity. Equity is the difference between the value of your home and the remaining unpaid principal balance of your mortgage. For example, a home worth $350,000 with a principal balance of $250,000 remaining has $100,000 in equity.
You can build equity by paying down your mortgage or making home improvements to increase the value of your home.
What the Loans Have in Common
First, the most important thing to know is that whichever loan you pick, you can use the cash for anything. A common myth is that home equity loans and lines of credit are the best for home improvement loans but can’t be used for other purposes. While they each have pros and cons for different purposes, there are no limitations to what you use the funds for.
Another thing both loans have in common is that the interest paid might be tax deductible. If you open a home equity loan or line of credit, it’s important to consult a tax advisor to see if you qualify.
Finally, home equity loans and HELOCs both depend on the equity in your home. This is the main factor in determining the amount you can borrow. Other factors include your credit score, debt-to-income ratio and income history.
How Does a Home Equity Loan Work?
A home equity loan functions similarly to any other one-time loan for a fixed amount. It has a fixed interest rate with a fixed term of repayment. This makes it easy to work into your budget since you’ll know how much you’ll be paying each month and how long it will take to pay off.
A fixed-rate home equity loan is great for specific, one-time purchases like a new car, a wedding or a home improvement project. Instead of paying for a large purchase up front, you can pay it off little by little with regular payments. You can also use it for debt consolidation, which lets you combine debts into one loan with a lower rate or better term.
Here are some highlights of a Del-One Home Equity Loan:
- Competitive, fixed interest rates
- Best used for several short-term or one-time needs
- The equity in your home is used as collateral
- Various repayment terms available that work uniquely for you
- Local decision-making and processing right here in Delaware
- Friendly service from one of the best Delaware Home Equity Loan lenders
How Does a HELOC Work?
A home equity line of credit functions similarly to a credit card. You can borrow up to the maximum of the line of credit, but you’ll pay interest only on the funds you use.
For example, if you’re approved for a $50,000 line of credit but borrow only $15,000 right now, you are charged interest on $15,000. If you borrow more before it’s paid off, you pay interest on the total amount borrowed. HELOCs are split into two periods: the timeframe when you can borrow funds (called the “draw period”), and the repayment period. Most HELOCs feature a 10-year draw period followed by a 15-year repayment period.
The flexibility of a HELOC is a key factor in many people deciding to open one over a home equity loan. It’s up to you if you draw from the line of credit all at once or various amounts at different times. However, HELOC rates are variable, meaning your interest rate isn’t guaranteed.
A HELOC is a great way to pay for ongoing expenses or to have as an emergency reserve. Some common uses are college tuition, medical expenses or a series of small home improvement projects.
Here are some highlights of a Del-One HELOC:
- Competitive, variable interest rates
- Various repayment terms that work uniquely for you
- Funds available anytime during the draw period—no need to reapply
- Revolving credit – as you make payments, more funds become available for use
- Funds easily available via checks or in-person or phone transfers to a Del-One FCU checking account
- Set up monthly automatic payments to deduct from your account
- Friendly service from one of the best HELOC lenders in Delaware
Which One Should You Choose?
Besides getting a lump sum up front, the fixed monthly payments and interest rate are the key factors of a home equity loan. A loan is easier to budget for than a line of credit, and that predictability is the key deciding factor for many people. However, if you don’t need a large sum of money up front, a line of credit could be the better option for you.
With a HELOC, you may not know what the home equity line of credit rate will be since it’s variable. However, you don’t have to pay interest on funds you don’t borrow. This gives you a lot more flexibility so you can decide how much and when to borrow funds you need. You’ll also have security knowing you have funds easily available to borrow when you need it without having to reapply for a loan.
Ultimately, it’s important to ask yourself what you’re borrowing the money for, if you prefer a fixed or variable rate, and if you want the option of easily borrowing more in the future from a line of credit.
Safety Net for Home Equity Loans and HELOCs at Del-One
Speaking of security – did you know you can protect your loans? A common worry when considering a home equity loan or line of credit is what will happen if there is an unpredictable situation such as a major illness or job loss. Del-One offers optional debt protection to cover major life events.
Adding debt protection helps ease worries knowing you have a safety net for your home equity loan or HELOC in Delaware. It can be a smart choice if it fits within your budget and you’re worried about unexpected events.
Ready to Get Started?
We’re ready to help you use the equity you’ve built in your home for a fixed-rate loan or variable-rate line of credit. If you have questions, contact us or stop by a branch for answers. If you’re ready to apply, click here to schedule an appointment or apply now.
