Choosing Between Home Equity Loans and Lines of Credit LUSO Federal Credit Union 2016-07-14 23:02:19 Important Information
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monetary house on a white background. 3D image“Home equity” refers to the current value of your home. If you have a mortgage, your equity is the difference between the home’s market value and the amount remaining on the debt. If you don’t have a mortgage, your home equity is more or less equal to its market value. There are two forms of financing that can allow you to tap in to the value of your home’s equity: a home equity loan or a home equity line of credit (HELOC). Both allow you to tap in to some extra wealth, but differ in how they go about this and are not equally suited for all needs. Understanding how these financing methods work is important to making sure you pick the one that can best provide what you want.

What Is a Home Equity Loan?

A home equity loan is best understood as a form of a second mortgage. You are provided with a fixed-rate loan in the form of a single, lump sum of money that is drawn from your home’s equity. Like a mortgage, the interest and principal need to be paid each month. Home equity loans typically come with five-, 10-, or 15-year terms, though the availability of these and other terms will vary by lending institution; some might go as far as to offer 30-year terms, for instance.

Who Is a Home Equity Loan Good For?

Since they are used to get a single, one-time infusion of funds, home equity loans are a secure way of paying for a specific purpose. One thing to keep in mind is that you aren’t able to draw equity from the loan other than the initial lump sum, which makes home equity loans inadvisable as a more persistent source of money. Home equity loans are also useful if you like the current terms of your mortgage but still need immediate funds. They are also useful for anyone who prefers secure forms of debt due to the fixed interest rate; this means that you can more easily plan out how to make payments without worry of unexpected changes.

What is a Home Equity Line of Credit?

A home equity line of credit is best understood as a type of low-interest credit card that draws on your home’s equity instead of a credit limit. Instead of a single lump sum, you only receive the loan when you make a payment and only for the amount being spent. This allows for more controlled payments since you only need to repay (and pay interest on) what you have actually borrowed, as opposed to repaying the full amount immediately. Although the interest rate on a HELOC is lower than a home equity loan, the rate is not fixed and will go up or down, depending on market changes.

Who is a HELOC Good For?

A HELOC allows for more flexibility since it gives you easy access to money, but you don’t need to pay interest until you actually spend it. This makes a HELOC more suited to situations that feature a series of larger payments you would have difficulty to meet otherwise. For example, if you are a student, a HELOC could cover your yearly tuition, or, if you are in the midst of a home renovation, a HELOC could be drawn on periodically to pay contractors or buy new appliances. Alternatively, a HELOC could function as an emergency reserve in the case of something like medical bills. In short, a HELOC is ideal to cover large costs, but not ones large enough to justify drawing on your home’s entire equity at once.

A Local Source for Home Equity Loans and a HELOC

LUSO Federal Credit Union is a member-owned, not-for-profit financial cooperative organization dedicated to providing its members with quality financial services and products. We at LUSO pride ourselves on serving the financial needs of those who live, work, worship, do business, or attend school throughout Hampden County, Springfield, and Westfield, Massachusetts, regardless of economic status.

Feel free to contact our Ludlow branch toll-free at 1-844-LUSO-FCU or our Wilbraham branch at 1-800-808-5876.