3 advantages of choosing a HELOC over a home equity loan
Homeowners who need extra funds often turn to home equity loans and home equity lines of credit (HELOCs). Both let you tap into your home equity to fund any expense at comparatively low interest rates, and both offer tax advantages not found with other borrowing options.
However, there are some notable differences between these two products. Knowing how these differences stack up can help you decide which is best for your needs.
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3 advantages of choosing a HELOC over a home equity loan
The best home equity product for you depends on many factors. A HELOC may be better suited for borrowers looking for the following benefits.
Flexibility
One of the primary advantages of getting a HELOC over a home equity loan is the flexibility it offers. A HELOC is a revolving line of credit, which means you can borrow money up to a preset limit at any time during the draw period (which is tyically five to 10 years). You repay only the amount you borrowed, and you only need to pay interest during the draw period.
By contrast, a home equity loan gives you a lump sum upfront, you and must repay the entire amount (principal plus interest) starting immediately. If you take out more than you wind up needing, you'll pay unnecessary interest that can add hundreds of dollars to your total borrowing costs.
HELOCs also offer payment flexibility. Some lenders allow you to make payments toward both the principal and interest during the draw period so you can pay your balance off faster and avoid additional interest. When you take a home equity loan, you must make fixed monthly payments over a preset term, regardless of your budget and preferences.
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Ready access to funds
A HELOC gives you access to cash as you need it, without waiting for loan approval or processing. This provides a safety net you can turn to in the event of an emergency expense, job loss or other unexpected hardship.
And since HELOCs offer significantly lower rates than credit cards and personal loans, they can save you a considerable amount of interest over the course of repayment.
Lower interest rates and closing costs
Since a HELOC is a revolving credit rather than a large lump-sum loan, it's less risky for lenders. As a result, they can afford to charge lower interest rates on HELOCs, making them a more affordable way for homeowners to access the equity in their homes. HELOCs also tend to have low (or no) closing costs compared to home equity loans.
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The bottom line
Both home equity loans and HELOCs can be effective ways to finance large expenses, but a HELOC may be a wiser choice for homeowners looking for financial flexibility, lower interest rates and closing costs, and the option to access funds only as needed.
However, it's essential to weigh your options carefully, considering your current financial situation and future goals. A financial advisor or reputable lender can help you determine the best course of action for you.
"Taking out a home equity loan or HELOC is a big decision, so it's important to do your research and make sure you're getting the best deal possible," says Mike Qiu, real estate agent and owner of Good As Sold Home Buyers. "By understanding the pros and cons of each type of loan and considering your individual circumstances, you can make an informed decision that's right for you."
