When considering the borrowing or getting money out of your home you may come across two terms namely home loan vs HELOC. Each of these has strengths and weaknesses and can be appropriate in certain circumstances. In this blog, we will discuss the important aspects that distinguishes a home loan vs HELOC to allow you to make the correct choice.
What is a Home Loan?
A home loan, also known as a mortgage, is a type of loan used to purchase or refinance a property. When you take out a home loan, you borrow a lump sum of money from a lender and agree to repay it over a set period with interest.
Types of Home Loans
- Fixed-Rate Mortgage: In fixed rate mortgage formulas, the interest rate is fixed which means that the interest charged will not change throughout the entire period of the loan. This means fixed monthly instalments for repayment as well as shield against rate of interest changes.
- Adjustable-Rate Mortgage (ARM): An ARM includes an interest rate that fluctuates after a stipulated period through adjustment to market conditions. Originally, ARM is cheaper since the interest rates are frequently lower, but, in the end, the payments can increase.
Advantages of Home Loans
- Predictable Payments: Home fixed rates loans provide certain with a constant amount especially when it comes to paying monthly installments.
- Long-Term Financing: A home loan is also popular and it could be over several years such as 15 years, 20 years or 30 years.
- Tax Benefits: Mortgage interest is another cost that can also be considered as tax allowable.
What is a HELOC?
A Home Equity Line of Credit (HELOC) is a credit that is available in form of a line of credit whereby the borrowers get to borrow money with the use of their homes as collateral. HELOC is therefore a more flexible term to the borrower since he can borrow as when he needs it and not necessarily in home loan.
How HELOCs Work
- Credit Limit: In the same way, the total amount of credit which you are allowed entails the home equity that you have and credit worthiness.
- Draw Period: The draw period allows loaning of money to the amount equal to credit limit and only interest is paid.
- Repayment Period: After this, the draw period is followed by the repayment period where you pay off the loan amount inclusive of the interest.
Advantages of HELOCs
- Flexibility: Just withdraw cash to your needed amount depending on your available credit line.
- Interest-Only Payments: In them, you are also allowed to make interest payment only especially during the draw period.
- Lower Initial Rates: The interest rates for HELOCs are generally known to be lower when compared to home loans when one is first taken.
Home Loan vs HELOC: Key Differences
Knowledge of differences between home loan vs HELOC enables one to choose the right one for the given condition.
Repayment Structure
A home loan is a product whereby you make periodic payments comprising of principal and interest on the loan agreement period. It is quite linear here, and one can predict rather easily what lies ahead. Unlike it, a HELOC is much more versatile where you can borrow money and pay only the interest on the amount within the draw period. Repayment of the principal starts after the agreed duration Sapling.
Interest Rates
There are two basic types of home loans, namely, fixed-rate and adjustable rate. The advantage of conventional loans with fixed rate means that the payments are always constant and on the other hand, the advantage of an ARM is that it is cheaper in initial years as compared to a fixed loan. HELOCs on the other hand, are usually offered at variable interest rates, meaning you’ll have to pay more if certain conditions in the market surface.
Loan Terms
Home loans normally have longer durations for loan repayment ranging from fifteen to thirty years. This extended terms ends to be cheaper in terms of monthly contribution but costly in terms of total interest that is incurs from the credit. HELOCs are usually of short-term and allow more options for credit access but calls for efficient management in order not to attract higher costs.
Uses and Flexibility
Home loan can be availed only for the purchase of a home or to avail a new loan to replace the existing one. It is designed in such a way that they are paid out in a sum of money for a particular purpose. HELOCs offers a continuous line of credit, and is useful for home improvements, debts consolidation or emergency situations.
Home Loan vs HELOC Calculator
If you would like to know which of the two is better for you, then don’t hesitate using a Home Loan vs HELOC Calculator. It enables one to establish the potential gains and losses which results from each option depending with ones financial prowess.
Choosing the Right Option of Home Loan vs HELOC for you
Deciding on the two options depends on the client’s need and flexibility of the loan products that is a home loan or a HELOC. Some of the things that one should consider include the future and current goals and how one will be using the cash.
When to Choose a Home Loan
- This applies in cases where you require a big amount of money for home buying or home equity.
- You appreciate payment streams that are regular monthly and a fixed rate of interest.
- You need a long term financing solution.
When to Choose a HELOC
- You require consistent, steady availability of cash for some purposes such as performing home repairs or making other repairs amongst others.
- You desire this kind of flexibility where one can borrow money for whatever project as often as is necessary.
- There is a flexibility in terms of, the interest rate can be variable sometimes hence; the payments.
Conclusion
Home loans vs HELOCs are both good, but they have their own advantages and disadvantages. This way you will be able to know what is best in your situation by comparing its alternatives and seeing how it fits your financial situation. Below Q&A about home loan vs HELOC.
Q&A for Home Loan vs HELOC
1. What is the difference between a home loan and a HELOC?
Home loan is a one time borrowing with fixed or floating rates of interest which is to be paid back within a particular period of time. A HELOC is an open end credit which has a variable rate of interest and there is an option to borrow money in the time period known as draw period.
2. Is home equity the same as a home loan?
No, home equity is an amount of home value which is owned by home owner and it is not required to take any loan against it. A home loan is a kind of debt that you take to buy or to borrow money to pay for an existing home, while a HELOC is a kind of a loan in which you use your home’s equity as security.
3. Is there a better option than a HELOC?
Thus, the best choice is to select the option that perfectly meet your financial requirements. If you fancied easy access to money and are not bothered by fluctuating interest, a HELOC is perfect. On the other hand, for those people who value sure-sale cash inflows then a home loan may be more ideal for you.
4. What is the disadvantage of HELOC?
A HELOC has one considerable weakness of having an adjustable interest rate, and therefore, it has a variable payment. Also, in case the property value reduces or in case of any financial emergency, then it becomes difficult for one to pay the debt.
5. Why is my HELOC payment so high?
Sometimes, you find yourself paying a much higher amount of HELOC due to increase in interest rate, change in your credit limit or on account of the outstanding balances. Sometimes, the payment goes up due to terms of the loan and other times it may be because of the current interest rates in the market.