Understanding the difference between home equity loans and home equity lines of credit (HELOCs) can help you to make the right choice. Home equity loans offer predictability and stability in accessing and using your home’s equity.
However, the HELOC is an excellent choice in some specific circumstances.
Knowing the Difference
Understanding the differences between these different financial products can help you get the right one for your needs.
Payments
A home equity loan comes in a lump sum payment. This type of loan allows the property and homeowner to borrow against the current appraised value of the property. You can get one of these as a loan or an addition to an existing mortgage. The amount you can borrow is based on your property’s most current appraised value.
Private lenders can loan up to 75% of the value of the property. Existing mortgages and registered debts count toward this limit. These lump sum payments are received right away, and you repay them over a set term with a series of fixed payments.
A home equity line of credit (HELOC) is a revolving line of credit and has monthly payments tied to the amount you borrow. These are called revolving accounts, meaning you can repay what you owe and borrow more money. A HELOC can require only a minimum monthly payment that covers only the interest.
Some have a credit limit that increases as you pay off more of your home.
Of course, you must be aware of other differences between a home equity line of credit and home equity loans.
Fixed vs. Variable Interest Rates
The differences in rates between the two need to be highlighted.
Variable Rates and The Home Equity Line of Credit
A home equity line of credit employs variable rates, which are subject to interest rate changes. Borrowers need to remember that the lenders base these rates on the prime rate offered by the Bank of Canada (BoC). That means that the rates you get on a home equity line of credit and a home equity loan will vary according to the prime interest rate from the BoC and the percentage a lender tacks on.
One of the big advantages here is flexibility. Many home equity lines of credit allow a borrower to make interest-only payments. These can also come with lower initial fees and closing costs.
Fixed Rates and Home Equity Loans
Fixed rates are stable and consistent, and they are often used with home equity loans. These are great for homeowners looking for protection against interest rate spikes.
One of the big bonuses to a home equity loan with a fixed rate is the constant payments.
Some other differences between these kinds of loans include what each is used for.
Purpose and Usage
Home Equity Loans
These loans work for debt consolidation. Because they come in a lump sum payment, you can get a good amount of money right away. They typically have lower interest rates than unsecured loans.
This is an excellent product to finance home renovations or emergency repairs.
Home Equity Lines of Credit
One of the purposes of a home equity line of credit is flexibility. Unforeseen expenses can be covered without needing to reapply each time you need the money. This can come in handy for unexpected home or car repairs.
There’s also the potential for lower costs because the rates are variable. The HELOC is the better choice for that same homeowner who plans to do some Renovations that will last over time. This product allows the borrower to draw money out as needed for each phase of the project.
Getting the complete picture of either of these financial products means examining the possible risks for each.
Risk Management and Stability
Either of these products has risks, such as the possibility of foreclosure or power of sale if you don’t repay the loan. Here are some other things you need to know about these products.
For The Home Equity Loan:
- Getting a fixed rate with one of these loans makes payments predictable. However, the rate can be higher than that of a HELOC.
- A home equity loan provides a lump sum, and most borrowers need to be disciplined when investing that money.
For The HELOC
- Fluctuations in the variable rates with these can pressure your budget if they rise.
- Because of the revolving aspect, you can keep borrowing on a HELOC. Borrowers can be tempted to rack up more debt than intended.
There are a few things to look at when it comes to predictability.
Home Equity Loans provide stability versus the volatility of HELOCs
There’s a predictable fixed repayment schedule with a home equity loan. They are constantly the same each month with a defined loan term. The loans are also amortized. A borrower can see a steady reduction in the principal and interest as they make payments.
Knowing what’s necessary to get either of these loans is essential.
Qualification Requirements
The qualifications for either of these loans depend on whether you’re applying to a traditional or private lender.
- Private lenders emphasize a proper appraisal since the market value of the property is critical. To obtain a home equity line of credit or a home equity loan, you must have a substantial amount of equity, which is the portion of your property that is mortgage-free.
- Traditional lenders place more emphasis on things like a credit score and verifiable stable income. According to Equifax, a credit score below the 660 mark can present problems when being accepted for a loan.
The Financial Consumer Agency of Canada provides some good information on loans and lines of credit.
The last step is deciding which product is right for you and where to go.
Choosing the Right Option and MortgageBrokerStore.com
Because you get a lump sum payment, a home equity loan might be the right choice to finance an extensive home renovation. You’ll need to make monthly payments that you can budget for.
The HELOC allows you to borrow as much or as little as you want up to the credit limit. This is the better choice if you’re uncertain of the costs. This is a good choice for an emergency fund.
Mortgage Broker Store is a private lender, broker and real estate agent that can supply you with a HELOC or a home equity loan. We also have a variety of other financial products that suit potential borrowers with bad credit. The money we supply can stop a power of sale or foreclosure.
Email ron@mortgagebrokerstore.com or call 416-499-2122.
