The home equity line of credit (HELOC) is often referred to as a second mortgage. It can also be confused with a home equity loan, which is actually a slightly different type of mortgage loan. This article will help provide more clarity about home equity lines of credit, so that you can make the right decisions as a borrower.
HELOC vs. Home Equity Loan
First, it helps to understand the difference between a “line of credit” and a “loan.” Both use your home’s equity as collateral. Basically, you are borrowing from what you’ve already earned as the property has appreciated in value. However, the difference between a HELOC and a home equity loan is quite simple. A home equity loan is a lump-sum withdrawal of a specified amount.
Meanwhile a home equity line of credit is more open-ended. It gives you much more flexibility because you can take out money as you need it. You’ll have access to the same amount of cash, but it allows you to be smarter with your funds compared to taking it all out at once. Now, it may depend on what you want to use the money for. If you have a large one-time expense such as a major home renovation or to pay off other higher-interest debts all at once, then a home equity loan may make more sense. If you want to make the home upgrades over time, then a HELOC is usually much more effective.
HELOC Interest Rates
It’s important to realize that most home equity lines of credit have variable interest rates. As baseline interest rates go up or down, so you will your interest rate. As you withdraw from the line credit at different times, the rates attached to each withdrawal may vary. The lender will use the prime rate or the LIBOR (London Interbank Offered Rate, a benchmark used by many banks) to set the base rate and then add a markup depending on your credit profile. Always take into account the possibility of fluctuating interest rates before considering a HELOC.
How It Works
Once your home equity line of credit is approved by the lender, you can begin using the line of credit as you need it. Most HELOCs will have a set time period where the credit is accessible (also known as the “draw period”). In most cases, it is somewhere between 5-10 years. During this period, many lenders will allow the borrowers to make interest-only payments, though terms will vary from loan to loan.
How Much Equity Can You Access?
Again, this will vary from lender to lender and from borrower to borrower. Everyone’s credit and equity standings are different. Typically, the lender will set a percentage of your equity that you can use for a HELOC.
Make the Right Mortgage Decisions
Whether considering a home equity line of credit, home equity loan, refinance, cash-out refinance or any type of mortgage loan, be sure to thoroughly consider all of your options and consult with an expert.
The team at Transparent Mortgage is here to help. We’ll review your situation, walk you through your options and help you make the right loan decisions. Call us today at (619) 929-0199.