Is a home equity loan better than a HELOC?
Homeowners looking for alternative financing may want to consider forgoing traditional credit options like credit cards and personal loans and instead investigate their home equity options. By using a home equity loan or a home equity line of credit (HELOC), homeowners can pay for major expenses and home repairs, often at a lower interest rate than most other credit alternatives.
Both home equity loans and HELOCs have pros and cons, and what's right for one homeowner may not be beneficial for another. That said, there are some instances when a home equity loan may be better to use than a HELOC.
If you think you could benefit from using your home equity then explore your options here now.
Is a home equity loan better than a HELOC?
Here are two instances when a home equity loan may be preferable to a HELOC.
When you want a fixed interest rate
In today's economic climate, any predictability you can add to your budget and personal finances is welcome. Fortunately, a home equity loan can help in this regard by providing a fixed interest rate. This will help you plan better because you'll know exactly what you'll have to pay each month. And it will protect you against any negative developments in the larger economy and rate environment. When stacked up against a HELOC, which typically comes with a variable interest rate, a home equity loan may be the better option because of this factor.
Check your home equity loan options here to learn more.
When you need a lump sum of money
Home equity loans are exactly that — a lump sum of money withdrawn from the home equity you've accumulated. So if you know in advance that you'll need a lump sum (versus the revolving line of credit that a HELOC provides), this may be the better option. Borrowers tend to take out home equity loans to fund major expenses, pay for medical bills or to make substantial home repairs and improvements. If it's used for the latter, your home equity loan may even be tax-deductible if used for IRS-approved reasons.
"Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer's home that secures the loan," the IRS explains online. "The loan must be secured by the taxpayer's main home or second home (qualified residence), and meet other requirements."
Home equity loans also have a different repayment schedule than HELOCs, which you may prefer. Home equity loans are repaid just like a mortgage would be each month while HELOCs are only paid back once the repayment period starts and the draw period on the credit ends.
The bottom line
As with all financial decisions, the choice between using a home equity loan and a HELOC is a personal one. Some homeowners would benefit from using a home equity loan while others may be better off with a HELOC. It helps to familiarize yourself with both credit types before submitting an application for either. And be sure to shop around to improve your chances of securing the best interest rate and terms. You can easily check your home equity loan options online here now or by using the below table.
