If you’re a homeowner and you’re trying to choose between a traditional home equity loan and a HELOC (home equity line of credit), then you need to be aware of their differences and similarities. They’ve got their pros and cons, of course, and these details could make a major difference in your financial picture.
One way in which HELOCs and traditional home equity loans are different is their payment system. A traditional home equity loan gives the homeowner the entire amount of the loan all at once, at the beginning of the loan’s lifetime. If that works for you then that’s going to be something in a home equity loan’s favor. By contrast, a HELOC’s full amount can be accessed over time, according to your needs. That means you can get as much or as little of your approved credit as you like, when you like.
The two forms of credit also differ in how a bank (or the lending institution you’re dealing with) determines their interest rate. For home equity loans, the interest rate is very often fixed. That means you’ll always pay the same interest rate, regardless of market circumstances. The good news with a fixed rate is that when the prime rate or other major rate indices go up, people with variable interest rates are therefore paying more – while you’re safe with your fixed rate. Of course the flip side to that is when rates go down, people with HELOCs and a variable interest rate will be paying less, and you miss out on the lower, more advantageous rates.
To make a clear assessment of the pros and cons of HELOCs and home equity loans, be sure to sit down with a qualified financial advisor or bank representative and have them walk you through it all. When it comes to committing yourself to a major financial transaction, you need to have as much information as possible.