The pros and cons of home equity loans
NEW YORK, Feb. 16 12, 2022 (GLOBE NEWSWIRE) — A home equity loan and a home equity line of credit (HELOC) are two entirely different products, each with their own advantages and disadvantages. Ultimately, the pros and cons vary from person to person and may also depend on current rates. You should check the latest rates on lenders’ websites, such as Discover’s current home equity loan rates.
Advantages and disadvantages of home equity loans
Home equity loans offer a fixed interest rate, so monthly payments don’t change and stay the same for a set period of time. Home equity loans are typically used to consolidate debt, make home improvements, or finance one-time major expenses. Home equity loan terms tend to last anywhere from 10 to 30 years.
- Fixed interest rates, which means the home equity loan rates and payment amount remain the same for the life of the loan.
- Borrowers receive the funds in a lump sum at closing which can be used for a variety of different needs like home improvement, debt consolidation, weddings, etc.
- Home equity loans are a lump sum, while HELOCs provide funds as needed.
- Since the rates are fixed, the rate may be higher than the initial HELOC variable rate
Advantages and disadvantages of HELOC
A HELOC works like a credit card. The owner is given a credit limit (which is usually based on their net worth) and can withdraw as much as they want during a drawdown period. Usually, HELOCs have a drawing period of 5 to 10 years and repayment terms of up to 20 or 30 years.
- Owners only pay interest on what they withdraw.
- Typically, initial interest rates will start lower than home equity loans, but may increase.
- The credit rotates as the principal balance is paid off, providing flexibility to access funds as needed. The principal balance is the amount owing before interest.
- Can be used for a variety of reasons similar to home equity loans.
- The interest rates are variable and not fixed, which means that they can increase, as well as the amount of the monthly payments.
- Generally speaking, HELOCs can be riskier for those who lack financial discipline given their variable interest rates and payment amounts.
- The revolving credit allows the balance to be carried over to the next month, and the owner can decide to pay a minimum instead of the balance. This means that it will accrue interest on top of the principal balance, which may accumulate over time.
Home equity loans are often used for large one-time expenses and home improvements, while HELOC loans are often best suited for those who need an extra line of credit with a relatively low interest rate. .
Both home equity loans and HELOCs can be helpful depending on each homeowner’s situation. It is important to understand that they both use a home as collateral and it never hurts to consult a licensed professional for any financial advice.
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