Home Equity Loan vs HELOC: Which Should You Choose?
Home equity – the difference between the value of your home, and the unpaid balance of your mortgage. You can borrow against it to upgrade your home, finance a business venture, consolidate credit card debt – even take advantage of an investment opportunity.
Two common ways to access your equity are with a home equity loan or a home equity line of credit (HELOC). But what’s the difference – and which one should you choose?
What is a HELOC?
Offered by most major financial institutions, a home equity line of credit gives you access to money that’s secured against the value of your home. Just like a personal line of credit – or even a credit card – a HELOC works on revolving credit.
You can use your funds on an as-needed basis up to your credit limit. As you pay the money back, it becomes available to borrow again. In the meantime, however, you’ll pay interest (usually at a variable rate) on any money you borrow until it’s repaid.
HELOC Pros and Cons
HELOCs offer ease of access to credit based on the equity you hold in your home. And much like home equity loans, they make that funding available at interest rates that tend to be lower than unsecured loans or credit cards.
To get approved for a bank HELOC however, you’ll need to demonstrate:
- stable, adequate income,
- an acceptable income-to-debt ratio, and
- good credit score (a minimum of 680 is commonly required)
You’ll also need to pass a financial “stress test” showing you can afford payments at a higher rate of interest than the rate you’d actually be paying if approved.
What is a Home Equity Loan?
A home equity loan (or second mortgage) is a second loan you take out on your home in addition to your existing first mortgage. Like a HELOC, it’s secured against your home equity.
Unlike a revolving line of credit however, a home equity loan gives you a single, lump-sum payment deposited directly into your bank account. You’ll repay the loan on a fixed payment schedule, much like you would a first mortgage.
Home Equity Loan Pros and Cons
When you get approved for a home equity loan, interest accrues on the full loan amount over the term that it’s held. Payments that are part principal, part interest are made on a regular basis until the loan’s been paid out.
Unlike a bank-issued HELOC, however:
- you can usually get approved for a home equity loan from Alpine Credits regardless of your income or credit
- you may be able to access a larger portion of your home equity, and
- your interest rate will be fixed, doing away with the worry that market rates may rise
It’s not uncommon for homeowners to turn to their biggest asset to fund their biggest financial needs. A home equity loan can be especially helpful if you’re struggling to manage credit card debt, and your credit score is suffering as a result.
A second mortgage can eliminate higher interest debts by consolidating multiple payments into one. And all you need to apply for an Alpine Credits home equity loan is to own your own property. Our process is fast, simple, and most loan applications can be approved within 24 hours.