What Is The Difference Between A Home Equity Line Of Credit (HELOC) & A Home Equity Loan (HELOAN)
What Is The Difference Between A Home Equity Line Of Credit (HELOC) & A Home Equity Loan (HELOAN). Are they the same thing? Which is Better? We'll address those questions in this video. Thank you!
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Video Timeline: What Is The Difference Between A Home Equity Line Of Credit (HELOC) & A Home Equity Loan (HELOAN)
00:00 - Introduction
00:22 - What is a Home Equity Line of Credit (HELOC)?
00:33 - What is a Home Equity Loan (HELoan)?
00:44 - Comparing HELOC and HELoans
04:10 - Pros and Cons of a Home Equity Line of Credit (HELOC)
05:21 - Pros and Cons of a Home Equity Loan (HELoan)
#HELOC
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#HomeOwnership
#Finance101
#PersonalFinance
#LoanOptions
#BorrowingBasics
#HomeImprovement
#financialeducation
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#EquityExplained
If you are looking to borrow a little money based on the equity in your home, you might have come across the two main options: home equity line of credit (or HELOC) and home equity loan (HELoan). The question is what are the main differences between the two? And which one would be best for your situation?
A Home Equity Line of Credit is a form of revolving credit. That means that it is an open account from which you can pull money when you need it and pay it down when you can. A Home Equity Loan is a set amount, with a set term. You get a lump sum and you pay that sum over time.
Let’s compare the details of the two types of credit. Both the HELOC and the HELoan are secured by the equity in your home. So, in a sense, both of these are like second mortgages. The difference is in the flexibility of the two options. The HELOC will allow you to draw the funds when you need it. But the HELoan gives you the full amount you were approved for upfront. Let’s say you needed $100,000 for a home improvement project. With a HELOC, you would have an open account for $100,000. When you need to make a payment to a contractor, you could pull the exact amount of money you need from the account. With the HELoan, the bank would give you all $100,000 up front. The chief downside to the HELoan is that you immediately pay interest on the full $100,000 even though you might not need it immediately.
This means that the HELOC payment is variable, because it will depend on how much you are currently borrowing. The HELoan is amortized, which means that the payment will be the same for the length of a fixed term. Your HELoan has a consistent payment for every month during the entire length of the term. The HELOC is open-ended. You could draw down and pay off the loan repeatedly over time.
The interest rate you pay for a HELOC and a HELoan is different. A HELOC has a floating interest rate. It will change depending on the prime rate set by the FED. So, it is very possible that your interest rate could rise over time, even for the money that you have borrowed in the past. Similarly, it could drop over time. The rate usually only changes once a quarter, but how frequently it can change will depend on your loan terms. In contrast, the interest rate for HELoans is fixed. The interest rate you are given when you take out the loan is locked in for the life of the loan.
For many HELOCs you are only required to make the interest payment each month. So, you could choose not to pay down any of the principal. That’s great if you run into a particularly tight month, but it also means you won’t be making any progress paying down the debt. Of course, for HELoans, that isn’t an option. Your payment will always include a principal paydown amount.
