Understanding the differences between a home equity line of credit (HELOC) and a home equity loan can be helpful when making your financial decision. A HELOC offers flexible access to funds, allowing borrowers to draw money as needed and make interest-only payments during the draw period. On the other hand, a home equity loan provides a lump sum upfront with fixed monthly payments. The choice between the two depends on your specific circumstances, funding needs, and preference for repayment structure. HELOCs are ideal for those with fluctuating financing needs, while home equity loans suit individuals seeking a predictable repayment schedule.
Example: Suppose you purchased a home for $200,000, and after five years, your mortgage balance is down to $100,000. Now, you want to renovate your home and tap into its equity. A lender appraises your home at $220,000 and allows you to borrow up to $187,000, minus your existing mortgage balance. You have two options: a 15-year home equity loan for $87,000 with fixed monthly payments at 4.5% interest or a home equity line of credit (HELOC) for the same amount at 6% interest, with monthly interest-only payments based on the amount you borrow. The choice depends on your preference for repayment and the flexibility you need for your renovation project.
Source: Forbes Advisor
For a more in depth understanding, seek a professional mortgage officer to determine whether a HELOC or a home equity loan is the right fit for you.
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Shirin Rezania Ramos | 858.345.0685 | www.shirinramos.com | Compass, DRE 0203379
