Your house doesn’t have to be just a place where you reside. If you pay off your mortgage and see your property value increase, then you will accumulate considerable home equity, and this can help you get extra funding.
The most popular methods of using this equity include opening a Home Equity Line of Credit (HELOC) and a home equity loan. Both are means of taking out a loan based on your home, but there is a certain difference between them.
Like, a HELOC can be considered similar to a revolving credit line where you are able to take out money based on your limits, repay it, and reuse it. The home equity loan usually means getting a certain amount of money in one go.
Therefore, which choice is better for you? Let us see how a HELOC compares with a home equity loan.
What Is HELOC?
The Home Equity Line of Credit (HELOC) refers to revolving credit which is collateralized with your house. Instead of getting the whole credit at once, you can receive funds as you need them up to the credit limit. When you repay your debt, you are likely to get access to your credit limit once again.
Therefore, this option may come in useful if you have multiple expenses throughout the year or simply do not know the exact amount needed. It is characterized by fluctuating interest rates.
What Is A Home Equity Loan?
A home equity loan involves borrowing a particular amount of money at once, depending on the value of your house equity.
In home equity loans, you receive your loan in advance and repay the loan by instalments that comprise interest and principal amounts. You will be unable to borrow the amount of money through the original loan after repaying it.
Comparison Between HELOC And Home Equity Loan
Funds availability
HELOC: Draw funds as needed.
Home Equity Loan: Receive a single lump sum.
Structure of credit
HELOC: Revolving credit.
Home Equity Loan: Closed-end installment loan.
Interest rate
HELOC: Generally adjustable.
Home Equity Loan: Fixed or adjustable.
Payments
HELOC: Payments may be flexible.
Home Equity Loan: Principal and interest payments are made according to a set schedule.
Reusability of credit
HELOC: Credit can be reused as you repay it.
Home Equity Loan: Credit cannot be reused once the loan is disbursed.
Best suited for
HELOC: Ongoing or unforeseen expenses.
Home Equity Loan: Planned or foreseen expenses.
House as collateral
HELOC: Yes, the house serves as collateral.
Home Equity Loan: Yes, the house serves as collateral.
The key difference between the two is the flexibility against predictability.
How Much Can You Borrow?
There is no set amount that you will be able to borrow, and it will depend on factors such as the value of the home you are purchasing, how much is outstanding on any existing mortgage and the level of equity that you have.
The Financial Consumer Agency of Canada states that for home equity borrowing in Canada, the maximum amount that you can borrow is 80% of the value of your home, depending on the product and any other debts you may have. The HELOC allows you to borrow 65% of the value of the property through the HELOC.
For example:
· Value of home: $600,000
· Amount owed on current mortgage: $350,000
· Equity in the home: $250,000
When Should You Consider A HELOC?
A HELOC may be an option for those who want to borrow with some flexibility rather than one lump sum.
For Home Improvements
There can be variations in home improvement costs as work proceeds, and a HELOC will allow you to access funds for each expense as opposed to borrowing the full estimate of costs up front.
Unforeseen Costs
There may be situations where unforeseen costs arise that would require access to borrowed funds, but only if there is enough credit availability and repayment ability.
For Debt Consolidation
There can be homeowners who use home equity financing to consolidate high-interest debts, although turning unsecured debt into secured debt is risky and requires careful consideration.
Recurring Needs For Money
If you need money at intervals, the revolving characteristic of a HELOC may be useful.
When Is A Home Equity Loan More Suitable?
A home equity loan would be more suitable if you are aware of how much money you need. This type of loan can be helpful in cases like:
· An expensive home improvement task whose expenses are known in advance
· An expensive item which will be bought sometime in future
· A specific amount required for debt consolidation
· Some kind of large one-time requirement
Since you get all the money at once, it is easy for budgeting since you are already aware of how much money you are going to borrow initially.
In case of fixed interest rates, the payment schedule is also better.
Risks Associated With HELOC And Home Equity Loan
They both have the risk of using your home as collateral.
It is crucial to know that non-repayment of the money borrowed would result in losing your home.
The other risk associated with a HELOC is the interest rate fluctuation. It means that you will have to pay more for interest when it rises.
The other risk of HELOC comes from its versatility. The Financial Consumer Agency of Canada points out that having easy access to HELOCs could encourage borrowers to borrow beyond their capacity.
The other option, a home equity loan, comes with less risk since it has more structure. It means that you would have to pay regardless of the changes in your financial situation.
HELOC Vs. Home Equity Loan: Which One Is The Right Choice For You?
Go For HELOC When:
· You need funds for different stages.
· Expenses can vary.
· You would like to borrow, pay off the debt and possibly re-borrow.
· You don’t mind a variable interest rate.
· You want flexibility in accessing available funds.
Think About Taking Out A Home Equity Loan When:
· You know exactly how much you need.
· You have a big one-time expense.
· You need a predetermined repayment plan.
· Payment predictability matters to you.
· You don’t need continuous access to the funds.
There is no one-size-fits-all solution here. It’s all about what works best in your case.
Choose EverLend For Home Equity Financing
However, the choice between HELOC vs home equity loan might become complicated when different financial institutions offer different rates, terms and conditions and different borrower qualification criteria.
EverLend is a Canadian provider of advice regarding mortgage and home equity financing according to an individual client's situation. Instead of treating this choice as simply picking between two products, it is possible to discuss one's goals and find financing solutions.
The mortgage solutions are offered by EverLend to homeowners who want to utilize their equity, refinance or look for other mortgage options. Our service is built upon providing customized mortgage advice and mortgage solutions from multiple lending sources.
We can be very helpful when you do not know if you should get a revolving HELOC or a lump sum home equity loan. Instead of making a choice only by comparing interest rates, you will be able to take into consideration the required amount of funds, payment expectations and your financial objectives.
Contact Details
150 Ferrand Drive, Suite 1500, North York, ON
TEL. No.: +1 416-618-0786
Email: info@everlend.ca
Conclusion
HELOC and Home Equity Loan both allow you to utilize the equity of your home, however for different purposes. While HELOC is good for flexibility in borrowing, a home equity loan gives you the option of taking a single amount in loan repayable through a set schedule. Take a look at their interest rate and repayment conditions before opting for any.
Frequently Asked Questions
What is a HELOC?
A revolving credit arrangement that enables borrowing against home equity when necessary.
What is a home equity loan?
A loan in which one borrows a lump sum against home equity that is paid back according to the agreed period.
Which one is better, HELOC or home equity loan?
This depends on whether one needs flexibility or a fixed amount.
Is HELOC cheaper?
No, this is not necessarily true since the rates, terms, and duration of repayment influence the cost of borrowing.
Can I consolidate debts using home equity?
Yes, both these types of borrowing can be used for debt consolidation, depending on the lender's discretion.
Do I pay variable interest rates in a HELOC?
Yes, most HELOCs usually have variable interest rates.
Does home equity borrowing expose me to the risk of losing my home?
Yes, because the home is the security for the borrowing, therefore failure to repay could pose dire consequences.
Does EverLend offer any assistance?
Yes, EverLend will assist in exploring home equity financing options.