Reverse Mortgage vs Home Equity Loan vs. HELOC: What's the Difference?

Table of Content

• Choosing a home equity loan vs. a home equity line of credit
• What are the requirements for a HELOC or a home equity loan?
• Mortgage Vs Line Of Credit Vs Home Equity Line Of Credit – Which Is Better?
• What should people consider when they take a home equity loan?
• What is an unsecured loan?
• Equifax Value Products

While qualifying DTIs vary depending on the lender, the general rule of thumb is that your debt should be less than 43% of your total monthly income. Whether you need a one-time lump sum or access to cash on an as-needed basis, these types of financing can be flexible and accessible options. Each advance works like an installment loan with fixed payments for the term you choose. Take any portion of your line, convert it to a fixed-rate advance, and choose your repayment term...no application needed. Some people aren’t comfortable with the HELOC’s variable interest rate and prefer the home equity loan for the stability and predictability of fixed payments and knowing how much they owe. A home equity loan’s interest rate is fixed, meaning that the rate doesn’t change over the years.

In some cases, you may be able to switch from a fixed to variable rate, or vice versa, during the repayment period. This option may be good for someone who has inconsistent income or is using their Heloc proceeds to buy an investment property that won’t generate much cash for the first few years, he says. Consolidating credit card debt is another common use, since rates on credit cards can be as much as double what they are on home equity loans.

Choosing a home equity loan vs. a home equity line of credit

Then, to provide access to the funds, some lines of credit may allow the borrower to write checks, while others include a type of credit card. A HELOC has a set credit limit from which you can access your funds at any time during the initial ten-year disbursement period. A HELOC has a variable interest rate, meaning the rate can increase or decrease over the years.

This lender allows borrowers to opt for a fixed-rate option, which means that borrowers can convert their variable rates into fixed rates at account opening or during the loan term. By having a fixed APR, borrowers won’t need to face fluctuating interest every month. Reverse mortgages, home equity loans, and HELOCs all allow you to convert your home equity into cash.

What are the requirements for a HELOC or a home equity loan?

Programs, rates, terms and conditions are subject to change without notice. Unlike a conventional loan, a home equity line of credit is something you establish ahead of time and use when and if you need it. In that way, it’s a little like a credit card, except with a HELOC, your home is used as collateral.

Personal Finance Discover personal finance tips and tricks around everything from managing your money to saving and planning for the future. Credit Scores Understand credit scores, credit worthiness, and how credit scores are used in day-to-day life. Get peace of mind when you choose from our comprehensive 3-bureau credit monitoring and identity theft protection plans. For example, if your home is worth $250,000, and your current loan balance is $175,000, you could access $37,500 with a home equity loan or HELOC. A home equity loan is a consumer loan allowing homeowners to borrow against the equity in their home.

Mortgage Vs Line Of Credit Vs Home Equity Line Of Credit – Which Is Better?

Many lenders will only accept credit scores of 700 or above, while some may accept credit scores in the mid-600s. Having a high credit score is crucial for securing a better interest rate on your home equity loan. Home equity is your property's market value minus the amount you owe on any liens, such as your mortgage.

It has a variable interest rate, which means the borrower is not bound to a fixed monthly payment. It gives a revolving credit facility that allows applicants to borrow as many times at a certain limit. Lenders also willingly offer rates lower than personal loans, which are very competitive. In addition, most HELOCs give special checks or credit cards to borrowers. Once approved, the lender sets interest, repayments, and other terms for the line of credit.

HELOC requirements

If you’re looking to tap the wealth you’ve built through homeownership, a home equity line of credit, or Heloc, can be one of the most flexible and least expensive options available. If your project or expense has a fixed cost, however, and the schedule is firmly set, then the HEL might be the better route to go. You will have the money disbursed at once and can pay for your expenses on your schedule. Aly J. Yale is a freelance writer with extensive experience covering real estate, mortgage and personal finance.

Typically, home equity loan payments are fixed and paid monthly. If you default on your loan by missing payments or become unable to pay off the debt, the lender may take ownership of your property through a legal process known as foreclosure. If faced with foreclosure, you may be forced to sell your home in order to pay off the remaining debt. During the HELOC’s draw period, you still have to make payments, which are typically interest-only. As a result, the payments during the draw period tend to be small.

It’s important to note, however, that your home acts as collateral, so you risk losing your home to foreclosure if you default on the loan. With a standard home equity loan, you pay interest on the entire loan amount, but with a HELOC, you pay interest only on the money you actually withdraw. All three debt instruments have advantages and disadvantages that homeowners need to take into consideration to determine which one is right for them. A home equity loan involves a single lump-sum payment that is repaid in regular installments to cover the principal and interest .

A home equity line of credit is a type of second mortgage, as is a home equity loan. It works like a credit card that can be repeatedly used and repaid in monthly payments. It is a secured loan, with the accountholder's home serving as the security. A HELOC gives you the flexibility of a financial backstop that’s there when you need it. If your roof needs repair or a tuition bill comes due when you’re short of cash, drawing on a home equity line of credit can be a convenient solution. You decide when to use the funds, and you pay interest only on the money you actually use.

What is an unsecured loan?

In these situations, borrowers may turn to either a home equity loan or a home equity line of credit . A home equity loan has an initial disbursement at closing, requires principal & interest payments to be repaid over a fixed period , and usually has a fixed rate for the entire term. It is possible to get approved without meeting these requirements by going through lenders that specialize in high-risk borrowers, but expect to pay much higher interest rates. If you are a high-risk borrower, it may be a good idea to seek out a credit counseling service for advice and assistance before signing up for a high-interest HELOC or home equity loan. However, an equity line of credit is revocable—just like a credit card. If your financial situation worsens or your home’s market value declines, then your lender could decide to lower or close your credit line.

Most lenders only offer variable-rate Helocs, where the interest rate changes based on prevailing market rates, sometimes as often as every month. The process of applying for a Heloc—from filling out an application to paying closing costs—can take anywhere from a couple of weeks to over a month. Once in place, however, you can then use the line of credit to cover your spending whenever you need extra cash until you’ve borrowed the maximum. You’ve probably heard that the Federal Reserve has been increasing interest rates this year, but what does that mean for home equity loan and HELOC rates? That’s because HELOCs and other short-term borrowing products are generally directly tied to the Fed’s rate.

Sarah writes for Credit Karma and Impactivate, and her clients have included Glassdoor and the Institute for Humane Studies. Her articles have been published by Haven Life, KeyBank, Investopedia, First Citizens Bank of Raleigh, North Carolina and the Coosa Valley Credit Union. The choice between a home equity line of credit and a second mortgage will depend on your circumstances and why you need the money. For home repairs, many homeowners prefer a HELOC because of the flexibility it provides. A second mortgage can exist only if a first mortgage is in place.