Home Equity Line of Credit & Home Equity Loans

What Are Home Equity Loans & Home Equity Line of Credit (HELOC) and How Do They Work?

For many in the Kansas City area looking into remodeling their kitchen or bathroom, or needing money for a one-time home expense, homeowners most often have to decide between financing options. Home Equity Line of Credit (often referred to as HELOC) and Home Equity Loans both can provide benefits to new and current homeowners for a variety of reasons. But before discussing the benefits, it is important to understand what a Home Equity Line of Credit is, and what is a Home Equity Loan, and their differences. Both a home equity line of credit and a home equity loan are often called “second mortgages,” because they are loans that are attached to a home, but there are distinctions between the two types.

Home Equity Line of Credit works much more like a credit card, in which homeowners can borrow up to a certain amount of money, instead of a set dollar amount like from a home equity loan. Equity lines of credit allow homeowners to draw cash whenever needed, and up to each individual’s credit limit. This type of borrowing will usually have monthly payments that vary with an adjustable interest rate and the outstanding amount the homeowner has borrowed.

A Home Equity Loan can be the most structured in nature as they can be similar to primary mortgages. Such loans can have either fixed or variable interest rates, with the loan having a fixed rate that is most likely often higher than the first home mortgage. The home equity loan is amortized at the start and has a set term. Both the principal and interest payments must be paid back each month to the lender. Unlike a Home Equity Line of Credit, homeowners can take out one lump sum from the lender. However, borrowers cannot draw additional money in addition to the lump sum.

Advantages of Home Equity Line of Credit and Home Equity Loans

• With a Home Equity Line of Credit, since it is based on the borrower’s line of credit, the borrower can draw amounts over time. Homeowners can use a Home Equity Line of Credit to pay off home repairs and home remodels over a period of time, as borrowers can borrow money periodically based on their credit.
• An advantage to a home equity line of credit is to use it to pay for home remodels because it can add value to a home by leveraging the equity of it for these improvements.
• With a Home Equity Loan, homeowners can borrow a one-time lump sum to pay for expenses, such as emergency expenses that can unexpectedly occur.
• There typically are low rates with a home equity loan and with set monthly payments at a set term can make budgeting finances easier for your family.

Disadvantages & Risks of Home Equity Line of Credit and Home Equity Loans When Not Paying Amounts Back During Term

• The house is used as collateral and when both are not paid back, the bank can foreclose on the home. So it would be wise to pay these off when payments are due.

• There can often be prepayment penalties with home equity loans, meaning that payments must be the exact amount of principal and interest each month until the term ends. Early termination fees are usually a percentage of the outstanding balance on the loan.

• Another risk of home equity loans is “predatory lending.” This is when any dishonest lending practice imposes unfair and often abusive loan terms on a borrower and will try to coerce a borrower to borrow a larger amount than necessary or have to pay the loan back in unfair term limits. Predatory lending has become rarer since regulations were introduced following the recession, thus allowing borrowers more freedom and ease when borrowing.

• There usually is not another suitable reason for having a home equity line of credit other than home repairs and home remodels. There are numerous risks for using a home equity line of credit when homeowners use this money to pay for college, credit card debt at low interest rates, vehicles, dream vacations or a startup business.

Both home equity line of credit and home equity loans are advantageous to certain homeowners, but are usually not universal for all homeowners. It is recommended to find the best plan for your family without burdening yourself. When searching for a lender for either a home equity line of credit or a home equity loan, it’s best to find one who will discuss in detail their rates, outline the payment guidelines and help find you affordable payments.