Home Equity Line of Credit vs Home Equity Loan: Which is right for you?
What is the difference between home equity loans vs, home equity lines of credit (HELOC)? Both are options to leverage the equity of your home for cash, but each option works quite differently.
In this video, I'm going to explain what a home equity line of credit and a home equity loan is, and some of the pros and cons of each.
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Yes, you can get the one check and take the $50,000, but it is an adjustable rate mortgage based on the prime rate of money plus a margin set by your bank depending upon what deal that you negotiate and what products that they're offering. So it's an adjustable rate based on that prime rate. It's not fixed.
By the end of this video, you're gonna understand a very clear concept of a home equity loan versus a home equity line of credit. So stay tuned.
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Why is it important that you know the difference between the home equity loan and the home equity line of credit? Is a rate important to you? Are fees important to you? Are repayment terms important to you? Are balloons or adjustments or recaptures scary words, because they probably should be. If all of those things are important to you, that is the why as to why you should hang tight, check out this whole video so that I can tell you the differences as promised between a home equity line of credit and a home equity loan.
What is a home equity loan? Very simply explained, it is a loan that is allowing you to take equity out of your property, basically taking cash or take money from the equity that's in that real estate that you own. A home equity loan is a fixed rate loan generally speaking. It is for a fixed amortization.
I've seen five, seven, 10 and 15-year versions of a second mortgage also known as a home equity loan.
When you're comparing a first mortgage to an equity line of credit to a home equity loan, a home equity loan is going to have the highest interest rate of all of those three scenarios. What is a home equity line of credit? Well, if the loan gives you the equity out of your house or some of the equity out of your house and it's a fixed rate and it's a fixed term. Let's say if it's $50,000, you get $50,000, you do what you're doing with the $50,000 and the payments start and they're based on $50,000.
Well, a line of credit works differently. If you receive a $50,000 line of credit, yes, you can get the one check and take the $50,000, but it is an adjustable rate mortgage based on the prime rate of money plus a margin set by your bank depending upon what deal that you negotiate and what products that they're offering. So it's an adjustable rate based on that prime rate. It's not fixed. It is an open ended line of credit. So it is not a fixed term, such as five, seven, 10 or 15 years like I talked about with an equity loan.
Most of the time, the line of credit has a renewal every five years where they reassess it, see if they're willing to give it to you again. They may change the terms and conditions based on the new deal that you negotiate at that time.
Another big difference is that line of credit, let's say you get the $50,000 line of credit. Let's say that you never use it. Well, you never pay interest on it because a line of credit, the payment is based on what you've drawn to that point and what's outstanding when that payment is due. Let's do some simple numbers. $50,000 loan, let's say if the payment is $500 a month. You get 50,000, do whatever, you're paying 500 a month, 500 a month, 500 a month until it's paid off. Line of credit, $50,000 line of credit, you use 10,000, you don't use the 40. You're gonna pay interest and a payment on the 10,000.
Another huge feature, let's say now you need another 10,000 and another 10,000, you have access up to 50,000. Let's say that you get a 50,000 lower line of credit, you use $10,000, you pay it back, it's back down to zero. While it remains at zero, you have no payments. But then, let's say that you need to write a $40,000 check real quick. Boom, write it off the line of credit. It's flexible and there's a lot of examples where a home equity line of credit will be phenomenal for some people. But I find for most people that I've dealt with, you're gonna want more of a closed end loan, fixed rate loan, not adjustable, on a certain payment. Most people aren't looking to draw and give back and draw and give back. It's a line of credit to be used almost like let's say your credit card. You've got a $50,000 limit, you use 10, you pay it off, you use 10, you pay it off, so on and so forth.
I tried to make this video short and sweet for you today. It is a short and sweet topic. I'm gonna go ahead and give you a link to download my book for free. That's the international bestseller Mortgage Peace talking about how to get you a smooth and on-time closing.
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