Home Equity Loan vs HELOC: Which One Makes Sense for You

Home Equity Loan vs HELOC

Thinking about the different benefits of a home equity loan vs a HELOC. 8.5 million Canadian households own their own home. They make those monthly payments to work towards complete homeownership and to build equity over time. 

One big advantage to homeownership is equity. Equity often acts as a nest egg for later in life. Some opt to use equity to invest in a bigger or better home. Some people access their home equity when they need cash for a large purchase or even to do renovations on their home. 

Are you wondering how you can access the equity you have in your home? Homeowners will have two options when it comes to equity, a home equity loan or a home equity line of credit. 

Read on to learn more and consider which option might work best for you.

What Is a Home Equity Loan?

A home equity loan is an installment loan that you would take out with a lender like a mortgage company or bank. The loan would give you the funds in one lump sum at the time of the loan.

Then, like regular mortgage payments, you would make payments on the loan to pay it back with interest. Loan terms will differ from lender to lender on how long you have to pay back the loan. 

Depending on the amount of equity you have available in your home, will depend on the amount you can get from the home equity loan.

How Does a Home Loan Work?

When you take out a home equity loan, you are borrowing against the equity in your home. The equity becomes the collateral used to secure the loan. The lender will place a lien on the home to secure the loan you take out. 

Once you pay off the home equity loan, the lien is removed and the equity is yours again. It’s important to note that you only have so much equity in your home, so this type of loan doesn’t give you limitless borrowing power. 

For many people who want or need a larger sum of cash for something like home renovations, a home equity loan is a good choice. It should be noted that when you take out a mortgage, you can only use the funds at one given time as you are given a lump sum. However, by taking out a home equity loan, you can use the funds for anything. 

Home Equity Loan Positives

There are several benefits to consider related to a home equity loan. These include:

  • Interest rates and payments are fixed amounts
  • An installment loan means the same payment amount each month
  • Lump-sum borrowing is good for big expenses or purchases
  • Many lenders offer home equity loans.
  • Pay off credit cards or high-interest loans

Because this is a secured type of loan with your equity, you can usually get a good interest rate. 

Home Equity Loan Cons

Before you take out a home equity loan, there are a few things to know. 

  • Interest is charged on the lump sum, even if you don’t use the whole amount
  • Offers less flexibility than a home equity line of credit

One important thing to remember is that the loan is secured against the equity in your home. It is important to pay attention to the current market value of your home when selling to make sure there will be room to pay off anything registered against your property.

What Is a Home Equity Line of Credit?

A home equity line of credit or a HELOC is another way to use your home’s equity to access funds you might need. With a HELOC instead of taking out a loan in one lump sum, you instead establish a line of credit, much like you would with a credit card. 

When you establish this line of credit, you are securing it using the equity in your house which often means you can get a much better interest rate than you could with a credit card. You are not obligated to use the whole approved amount of the line of credit. In fact, you can access the funds as needed. 

You might take out some of the lines of credit, use them, and make payments. After that, it may be a while before you use the line of credit again. The line of credit stays active even when you are not using it on a monthly basis. Once established you can use it as needed as long as you still have available credit and have made your payments. 

How Does a Home Equity Line of Credit Work?

Like a credit card, this line of credit means you can borrow and pay back as needed. Often the interest rates connected to a HELOC are variable rates, so your payment amounts will vary based both on the interest rate and the amount you have borrowed. 

There are usually fewer fees connected to a HELOC compared to a home equity loan. Often this line of credit charges an origination fee. 

Pro of a Home Equity Line of Credit

There are several reasons to consider a HELOC over a home equity loan. You only pay interest on what you currently borrowed. This type of loan against your home affords you the ability to borrow funds, pay them back, and borrow more money as needed. 

If you are doing a project (home renovations) and don’t have a set budget, a line of credit can be helpful. You can access the funds as needed.  

Cons of a Home Equity Line of Credit

There are a couple of things to consider related to a HELOC. The line of credit will tie up the equity in your home whether you access the funds or not. 

HELOCs often have variable interest rates which can impact your payment if there are changes in the prime rate. You want to plan for any possible adjustments in the rate for your payments. 

Borrowing Power

When you seek either a home equity loan or a HELOC, lenders will consider the value of your home. They will also look at how much you owe for your current mortgage.

Don’t assume you can access all of the equity in your home through either of these loan options. Lenders use a loan-to-value equation to decide how much of your equity you can borrow.  

Home Equity Loan or Home Equity Line of Credit?

One of the biggest advantages of buying a home and making payments over time is the equity you build in your home. This equity can then allow you to get a  home equity loan or a HELOC using that equity. 

We offer a wider range of mortgage services to meet your needs. If you are looking for more information on a home equity loan or a home equity line of credit, we can help. Contact us today at 1-855-242-7732 to get more information.

David Jeffrey