In times past, homeowners could refinance their home mortgage loan in order to gain access to cash needed for expenses such as vacations, renovations, college, medical bills, or debt consolidation. This move put extra money in a homeowner’s pocket while lowering the interest rate on the home mortgage loan. Unfortunately, rising interest rates have made it impossible for homeowners who bought a home to refinance it at a good interest rate. Thus, home equity loans and HELOCs are becoming increasingly popular options for homeowners who need access to their home equity. 

Home equity loans and HELOCs are available from different banks, credit unions, and other lenders. In fact, your current mortgage lender may offer one or both types of financing. However, it’s important to know how home equity loans and HELOCs work, so you can pick the financing option that best meets your needs. 

Home Equity Loans 

A home equity loan is the best option if you need a lump sum of money for a particular expense. The interest rate for such loans tends to be about 1% to 1.5% higher than the average mortgage loan rate. However, your exact interest rate will depend on the value of your home and your current financial situation. Some lenders offer better rates than others, so it’s smart to shop around when you need this type of loan in order to find the lender with the best terms and conditions. 

A home equity loan is in some ways a second mortgage loan on your home. If you fail to pay it back on time, the lender can foreclose and you can lose your home. However, the upside is that the loan will have a fixed interest rate. You’ll know exactly how much you need to pay each month, and you don’t have to worry about rising interest rates impacting monthly payments. You may even be able to pay back the loan in advance if the lender doesn’t charge a prepayment penalty. 

Home Equity Lines of Credit (HELOCs) 

A HELOC isn’t a loan. Rather, it’s a line of credit that uses your home as collateral for repayment. This type of loan is ideal if you don’t know exactly how much money you need for a particular expense as you can withdraw varying sums of money at different times, and you only need to pay back what you withdraw. A HELOC loan can be more affordable than a home equity loan as the interest rate for HELOC loans is typically lower than it is for a home equity loan. What’s more, if you wind up spending less money than you’d anticipated, you only have to pay back what you actually spend, not the amount you originally intended to borrow. 

HELOC loans have a variable interest rate. The interest rate you’ll pay for any withdrawal will depend not only on your financial situation but also on when you make a withdrawal. This line of credit is usually better than taking out a credit card or obtaining a personal loan from a bank, especially if you are using the money to consolidate other debts. At the same time, you’ll want to stay abreast of current rates to ensure you have the money to pay back the withdrawal. A lender can foreclose on the home if the HELOC withdrawals aren’t paid on time. 

Furthermore, bear in mind that a lender can also close your HELOC if it determines that it’s no longer in the lender’s interest to keep it open. This often happens if your home loses value due to real estate market changes in your area, or if you keep a HELOC open for an extended period of time without making withdrawals. When you shop around for a lender, ask about conditions that could cause the HELOC to be revoked. 

Which Option is Best for You? 

Home equity loans and HELOCs can provide the financing you need for important expenses. In fact, you can even apply for both forms of financing if you see fit. Even so, each option has its advantages and disadvantages. Assess your financing needs carefully to see which option best meets your need. You may also want to talk to professionals who can help you make wise financial choices. If you intend to renovate the home, for instance, talk to a renovation company to see how much you’ll need. If you’re consolidating debt, talk to a financial advisor to make sure your loan will lower your debt-to-income ratio. With careful financial planning, you can use either a home equity loan or a home equity line of credit to improve your financial situation while covering expenses that are important to you. 

Have questions?

If you or anyone you know has questions about financing or the current housing market, your expert Los Angeles mortgage brokers at Peak Finance are here to help. Contact us today at [email protected].