Home Equity Loans vs. Home Equity Lines Of Credit
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Yardwork, cleaning, home improvement. These are appreciated by your house more than you know. And when the time is right, your house can repay you for your effort with its equity.
Here, we'll focus on two of the three ways (the other being cash-out refinancing) to tap into the equity you've built up: home equity loans and home equity lines of credit. Just read on to learn more.
What are the differences between a traditional home equity loan and a home equity line of credit (HELOC)? What are the advantages/disadvantages of each?
If you're a homeowner, you can borrow against the value of your house through either a home equity loan (often called a loan) or a home equity line of credit (often called a HELOC or a line). A typical home equity loan is a second mortgage with a set term, fixed rate and static monthly payment (although there are available home equity loans with adjustable rates). With a home equity loan, all the money is disbursed in a lump sum up front at the time of closing. A HELOC is a credit line typically with an adjustable rate and payment, and the option to draw as little as zero up front. Essentially, a HELOC is like a credit card in that you can use what you need and can repay all or the minimum payment each month.
Depending on the borrower, which is the right loan to pursue?
Generally, a HELOC is a good choice to meet ongoing cash needs, such as college tuition payments or medical bills. Those who are self employed, receive commission-based pay or depend on a bonus every year will also enjoy the flexibility of a HELOC. Basically, a HELOC is like a checking account or a credit card, and can be paid down and drawn out again repeatedly. Conversely, a home equity loan is more suitable when you need money for a specific, one-time purpose, such as buying a car or a major renovation. It is also more conducive to someone on a fixed income who needs the consistency of a monthly payment.
Which is easier to qualify for/obtain? Have regulations on either kind of loan become more stringent? Why?
The ability to qualify for both home equity loans and home equity lines of credit are essentially the same. In today's market, guidelines are fairly tight with most lenders requiring a credit score higher than 680, and a combined loan-to-value ratio of the first and second mortgages in the 80-90% range. Homeowners with high credit scores - above 720 - will qualify for the best rates. When exploring your options, homeowners should also consider a cash-out refinance which will generally offer a lower overall interest rate on both loans and have easier qualification guidelines.
Under what conditions should you avoid a HELOC? Under what conditions should you avoid a traditional home equity loan?
If you're on a fixed income budget and require a stable, consistent monthly payment, a home equity loan will be a better choice. HELOCs are better suited for folks who need flexibility in their monthly cash flow, or just want to have an emergency line of credit for unexpected expenses. In either case, a qualified loan consultant can help a homeowner understand the tradeoffs of each loan type, and the advantages and disadvantages of having two loans compared to a single larger loan.
Is now a good time to even consider one of these loans, considering the state of the lending market and real estate market? Is it better to perhaps wait until the subprime mess is further resolved or rates/terms improve for borrowers?
There is really no reason to wait. The present low long-term interest rates are very attractive rates in any market. The impact of the sub-prime credit crunch has been for lenders to tighten the guidelines and make these loans harder to qualify for. Again, a qualified loan consultant can quickly explain your options based on your individual situation.
How have home equity loans and HELOCs changed over the years? Have these products improved or become more complicated?
Banks have made HELOCs easier to get in recent years and have offered incentives such as no closing costs and introductory teaser rates for the most creditworthy homeowners. The ability to draw on your HELOC via a credit card provides even more flexibility.
Where is the best place to apply for a home equity loan or HELOC - a traditional bank/lender? A mortgage lender?
Banks, mortgage banks and other direct lenders will be the best choice. Some lenders have attempted to offer self-service HELOCs on their websites with limited consumer acceptance.
The Important Points To Remember.
If you are thinking about a home equity loan or a HELOC, you should apply as soon as possible. On the whole, home values have declined recently, which means that you might not qualify for as much money as you would have a year ago. Always speak to an experienced loan officer who can explain several different options and never agree to a pre-payment penalty.
Refinance.com has helped thousands of clients reach their home refinancing goals since 1989. One of the nation's leading mortgage companies, the company offers a diverse range of lending options - including FHA mortgages. Refinance.com is headquartered in New York City with offices in Syosset, NY, Boca Raton, FL, and Northville, MI. More information can be found at www.refinance.com .
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