Both Home Equity Lines of Credit (HELOCs) and Fixed Home Equity Loans are second mortgages that enable you to borrow against the equity in your home to access cash. That’s how they are alike, but it’s where the similarities end. A HELOC is a Line of Credit that enables you to borrow up to a pre-approved amount of your home’s equity and draw as you need over time. So why choose a HELOC instead of a Fixed Home Equity Loan? Read on to learn more.
Why Choose a HELOC?
You know you will be in need of various sums of money in the near future. You’re just not sure of exactly when or how much. If this sounds like your situation, then you probably want to choose a HELOC. It really makes the most sense for you when your monetary needs are spaced out. A big difference between a HELOC and a Fixed Home Equity Loan is that with a Fixed Home Equity you need to take the entire loan disbursement upfront in one lump payment. You also begin paying interest on that lump sum immediately. That’s not an ideal solution if you don’t need the money all at once. It could end up costing you much more in interest over the long run.
With a HELOC on the other hand, you borrow a certain amount, but take it as needed. It’s great if you have upcoming expenses, such as college tuition or wedding expenses, and don’t want to borrow until you’re ready to pay the bills. Choose a HELOC when you want to pre-plan for those expenses you know are in your future; especially, when they will be spread out over time. An important note, a HELOC usually has a variable rate. This means your interest rate could go up or down with market trends over the life of the loan and you need to be comfortable with that aspect of a HELOC.
Pros of a Home Equity Line of Credit (HELOC)
The biggest advantage of a HELOC is that you only have to pay interest on the amount you’ve drawn on the line. It saves you from making unnecessary interest payments on money you don’t need. HELOCs typically have a draw period which is a specified number of years that you can draw on the available line. During the draw period, you can often choose to just make interest payments, or you can opt to pay principal and interest payments. You have greater flexibility when repaying.
HELOCs also offer lower interest rates than Personal Loans or Credit Cards. This helps save on interest when you’re faced with larger expenses staggered over time. This might include educational costs or ongoing home improvement projects. A HELOC is also a nice backup for emergency expenses. Why? Because you don’t need to draw unless you actually need the funds.
HELOC Vs. Fixed Home Equity Loan
HELOC |
Home Equity Loan |
|
A Second Mortgage | Yes | Yes |
Interest Rate Type | Variable | Fixed |
Disbursement of Funds | Draw as you need it | One lump sum upfront |
Repayment Terms | Flexible/Payments based on draw* | Fixed monthly payments |
Interest Charged | Only pay interest as you draw | Entire loan balance |
Closing Costs | Typically No | Typically No |
Deductible Interest | In certain instances** |
In certain instances** |
The Ultimate HELOC from Benchmark FCU
Benchmark Federal Credit Union provides even greater flexibility and lower monthly payments with our Ultimate HELOC. Borrowers will benefit from a low introductory APR and the choice of two great repayment options; among many other perks. Click here to learn more.
*Terms may vary from loan to loan and according to lender. For instance, you may make interest-only payments during the draw period and then have a principle plus interest payment schedule after that.
** According to the IRS, you can deduct the interest paid on HELOCs if they are used to “buy, build, or substantially improve a taxpayer’s home that secures the loan.”