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HELOC vs. Home Equity Loan: The Professionals Consider How to Choose


Which home equity product is right for you depends on several factors.

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If you are thinking of a home owner Tapping into your home equityTwo common options you’re probably evaluating Home Equity Line of Credit (HELOC) And Home equity loan. Both products are great tools for accessing your home’s built-in value to finance everything from home improvements to debt consolidation. But each is more suitable for different situations.

How can you decide which one is right for you? We asked some experts for their opinions.

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HELOC vs. Home Equity Loan: The Professionals Consider How to Choose

HELOCs and home equity loans offer unique advantages and disadvantages. Here are the best uses for each, according to experts.

When a HELOC might be good for you

A HELOC A revolving line of credit that you can borrow from at any time during the draw period, which typically lasts five to 20 years. At the end of this period, you will start repaying your borrowed amount at a variable interest rate.

“(The) best way to think of a HELOC is as a credit card,” says John Boyd, CFP, founder and chief wealth advisor at MDRN Wealth. “A credit card provides capital when you need it, but if you don’t use the credit card, you don’t pay any interest. Same idea with a HELOC, your home without collateral.”

This flexibility makes HELOCs an ideal source of financing for ongoing expenses. “For example, if you want to renovate one room of your home at a time and pay off the balance before moving on to the next room, rather than doing a huge renovation all at once, a HELOC is more appropriate,” says Denny Supley, Realtor and co-founder of SparkRental.

Because you borrow what you need when you need it — and you only pay interest on the amount you borrow — HELOCs can save you substantial amounts compared to home equity loans. Theresa Raymond, principal broker and owner of TN Smoky Mtn Realty, provides the following example of a $100,000 total home renovation done over three years:

“With a HELOC, you can access funds as needed at the time of draw, borrowing $50,000 the first year, $30,000 the second year, and $20,000 the third year. With an average interest payment of $3,000 per year, the total interest paid over three years is $9,000. .

“In contrast, a home equity loan would require the full $100,000 in interest payments over the entire term, resulting in about $18,000 in interest payments. So, choosing a HELOC can save you about $9,000 in interest costs.”

Using HELOC funds for home renovations can also get you through Tax deductions. But in other cases this product can serve you well. Mike Cue, real estate agent and owner of Good As Sold Home Buyers, offers the following advice:

As an emergency fund: “Unexpected financial emergencies, such as medical bills or home repairs, may require immediate access to funds. A HELOC provides homeowners with a safety net, allowing them to tap into their home equity when emergency expenses arise.”To supplement freelance income: “Individuals with variable incomes, such as freelancers or commission-based workers, may find a HELOC beneficial. It can serve as a reliable source of funding during lean times, bridging the gap between income fluctuations.”For extra cash flow in retirement: “Retirees seeking additional income or a backup fund during retirement can use a HELOC to supplement their financial resources, providing greater peace of mind and flexibility in managing expenses.”

Explore your HELOC options online now!

When a home equity loan might be good for you

A Home equity loan Provides a lump sum of cash, which you start repaying immediately at a fixed interest rate. Since you pay interest on the full amount, this product is best when you need immediate access to a significant amount of money.

“Home equity loans work well for one-time large expenses, such as a home renovation,” Supplee says. “You can borrow at a fixed interest rate – a big advantage when interest rates are low.”

This interest rate advantage makes home equity loans particularly helpful High interest debt consolidation.

“Just imagine you have a credit card balance of $15,000 at an APR of 18.25%,” says Raymond. “If you make monthly payments of $300 it will take 46 months and charge $3,629 in interest. If you get a home equity loan at 5.49%, everything changes. With monthly payments of $300, you will pay off your loan in 37 months. And the interest is $875.”

Like a HELOC, home equity loans interest May be tax deductible If you use the funds for IRS-approved home improvements. Other potential uses for these funds, per Qiu, include:

Paying for Education: “Higher education costs, such as tuition fees or student loans, can be challenging to finance. A home equity loan can offer more favorable interest rates than alternative loan options, making it an attractive choice for financing education.”As an alternative to other loans: “When buying a car, making a down payment on a second property, or investing in a business venture, a home equity loan can provide the necessary capital at a lower interest rate than other types of loans.”

Start your search today by viewing current home equity offers here.

Bottom line

“The decision between a home equity loan and a HELOC depends on the homeowner’s specific needs and circumstances,” Cue says. “A home equity loan is perfect for one-time expenses, debt consolidation and significant purchases, while a HELOC provides flexibility for ongoing needs, emergencies and irregular cash flow.”

To decide which option is best for you, consider Advantages – Disadvantages Within each, your intended use for the funds and how much you can repay on what timeline. When in doubt, consult a financial advisor for personal guidance.

MoneyWatch: Managing Your Money

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