Introduction
Are you curious about the difference between a home equity loan and a home equity line of credit (HELOC)? In this article, we will explore each topic in some detail. We will also compare and contrast the two. After reading this article, you will be better able to weigh the pros and cons and make the appropriate financial decision for you.
Before we dive in, just note that home equity loans and HELOCs are typically intended for larger expenses. If you’re looking for a smaller loan, Friendly Lender could connect you with an online lender in seconds. Just fill out our quick online application.
Home Equity Loans
A home equity loan allows a homeowner – like you – to borrow against the equity in their home. The loan amount is based on the difference between the home’s current market value and the homeowner’s mortgage balance owing. Home equity loans tend to have a fixed rate, whereas home equity lines of credit (HELOCs) tend to have variable rates.
With a home equity loan, you receive a one-time lump-sum payment, which can be a maximum of 80% of your home’s market value. An appraiser from the lending company will be the one to determine the value of your home. The interest rate applies to the entire amount. You will repay fixed amounts on a fixed term and schedule. The payments will cover both principal and interest.
Also known as second mortgages or add-on mortgages in Canada, home equity loans are frequently used for expenses that can increase the value of the home, such as a major renovation or a remodelled kitchen. Additionally, you may wish to use a home equity loan to consolidate credit card debt or pay for your child’s post-secondary education.
The application process is similar to that for a regular mortgage. A lender will require proof of income, assets, and debts, if any. As mentioned above, a professional appraiser from the lending company will determine the value of your home as part of the application process.
If you need a large sum of cash for a limited-time expense such as a wedding or a renovation, a home equity loan could be the way forward. The most significant downside to a home equity loan is that you risk losing your home if you are unable to make your payments on time.
Pros and Cons
To help you make a decision, here are some additional pros and cons of getting a home equity loan.
Pros
- Flexible spending – you can spend the money on almost anything you need
- You will receive a lump sum, which is beneficial if you need the money all at once for a large purchase or a renovation
- The loan repayment terms may range from five to thirty years, giving you a substantial amount of time to repay the loan
- You will receive competitive interest rates compared to those for credit cards and unsecured personal loans or lines of credit
Cons
- Less flexibility than a HELOC
- May carry a higher interest rate than a HELOC
- With both a home equity loan and a HELOC, you carry the risk of losing your home
- Upfront fees like appraisal and legal fees
Take all of the above into consideration when you make your decision. Read on to find out about the home equity line of credit and whether it may be better suited for your needs.
Home Equity Line of Credit (HELOC)
Unlike a home equity loan, a home equity line of credit (HELOC) is a revolving credit that works similarly to your credit card. You can repeatedly borrow against your home equity, most likely at a variable rate.
Similarly to a home equity loan, your home is used as collateral. Therefore, you run the risk of losing your home to foreclosure should you default on the loan.
The credit limit on a HELOC combined with a mortgage can be a maximum of 65% of your home’s purchase or market value. The amount of credit available in the HELOC will go up to that credit limit as you pay down the principal on your mortgage.
The requirements to get a HELOC include a minimum downpayment or equity of 20% in your home. In addition, a lender may require that you have an acceptable credit score, proof of a stable income, and an acceptable debt-to-income ratio.
The difference between a HELOC and a regular line of credit is that a HELOC is secured by your home equity, while a regular line of credit is not.
Items to Consider Before You Get a HELOC
You may want to consider the following items before you get a HELOC:
- Decide whether you really need extra credit or whether you could build and use savings instead
- Before you jump in, consider the fees, interest rates, and terms and conditions
- Make sure you have a plan for how you’re going to use the money you borrow
- Shop around and speak with different lenders
- Create a repayment schedule and stick to it
You may or may not need a HELOC. Consider all of the above before you take the plunge. Federally regulated banks must offer only the products and services that are appropriate for you, based on your financial circumstances and needs, while private lenders may offer more than you need, so choose wisely. That is why Equity Recharge may be a good option for you. They offer competitive rates and do not conduct a credit inquiry, and you can use the money how you want.
Pros and Cons of a HELOC
Consider the following pros and cons before you opt for a HELOC.
Pros
- Easy access to available credit
- The interest rates are often lower than unsecured loans and credit cards
- You can consolidate your debts, often at a lower interest rate
- You could possibly boost your credit by being responsible with your HELOC
Cons
- You must stay disciplined and organized with your payments
- Due to the large amount of available credit, you may be tempted to overspend, resulting in more debt carried over the long term
- Your lender may seize your home if you miss payments
- The interest rate is variable and may increase
You should weigh all the pros and cons listed above before you decide whether to get a HELOC.
Interest Rates
It’s possible to try to negotiate your interest rates with lenders. During such a negotiation, lenders will consider the following factors in your case:
- Your credit score
- Income stability
- Net worth
- Your home’s price
- Any existing relationship you may have with the lender
Do not borrow more than you can pay back. This will help you deal with any potential increase in your interest rate.
Fees
Some common fees are as follows:
- Home appraisal or valuation fees: Your lender charges this fee to send someone to assess your home’s value
- Legal fees: Your lawyer (or notary in Québec) or title service company charges this fee to register the collateral charge on your home
- Title search fees: This is another legal fee to ensure there are no liens on your home
- Administration fees: Your lender charges this fee for setting up and maintaining your account
- Credit insurance fees: also known as premiums for optional life, critical illness, disability and job loss insurance
- Discharge or cancellation fees: Your lender or your notary (in Québec) charges this fee if you cancel your HELOC and remove the collateral charge from the title of your home
Ask your lender about all the fees involved with your HELOC. Make sure you’re clear on the fees before you take out the HELOC.
Cancelling Your Home Equity Line of Credit
You must pay off your HELOC before you can cancel it. You can usually cancel within 10 days if you provide written notice.
Check your terms and conditions for more information about cancelling. If you’re unclear about anything, speak with your lender.
In Conclusion
The type of financial resources you need will depend on multiple factors. Take the above information into consideration when making your decision. Whether you take out a home equity loan or a HELOC, please remember that each carries the risk of losing your home to foreclosure, as both use your home as collateral. However, either option may be an effective way to borrow money to cover a large expense, provided that you’re able to make the payments in a timely manner. If you need a smaller loan, Friendly Lender could connect you with lenders across Canada.
If you’re interested in a HELOC, contact Equity Recharge. Their professionals will be happy to help you with any inquiries. Don’t let your financial future up to chance – take over the helm and work with the best in their field!
