Homeowners can use the equity in their homes to pay for home improvement projects, tuition, medical bills, and other expenses. Equity is the calculated difference between the current market value of the residence and the amount of principal owed on loans secured by the property. Home Equity Loans and Home Equity Lines of Credit (HELOCs) are two forms of low-interest financing. They allow borrowers to access equity without selling their homes.
With the recent Federal Reserve rate changes1
and further forecasting which loan option will make the most sense for your finances?
Here are four questions to ask when deciding between a HELOC and a home equity loan.
Do you have a specific effort in mind?
If the answer is yes, consider a home equity loan instead of a home equity line of credit. Knowing the amount required before applying for your equity loan can help secure a fixed rate loan with predictable monthly payments. Changes in the Fed rate will not affect your home loan. Financial institutions issue this type of equity loan in a lump sum. A set repayment amount and term are two of the most attractive features of home equity loans.
If you are planning on remodeling your home or other expenses that are usually funded incrementally, a HELOC may be a better option. With a HELOC, you only pay interest on the outstanding balance during your drawing period.
Can my budget easily adjust to a changing monthly payment?
If the answer is yes, the flexibility of a HELOC versus a home loan may be a better option. A HELOC has a similar function to a credit card in that authorized borrowers are permitted up to a certain credit limit. Borrowers can use as little or as much of the available balance as needed as long as they don’t exceed the credit limit threshold.
Another characteristic of a HELOC is that it is often assigned a floating rate. When the Fed interest rate changes, the interest rate assigned to the outstanding balance also changes, which can affect your monthly payment. However, HELOCs have the added benefit that borrowers can only make interest payments based on the amount borrowed.
What is my credit rating?
Your creditworthiness can play an important role in the interest rate assigned to your loan. The higher your credit rating, the greater the likelihood of getting a cheap interest rate. Before applying for a Home Equity Loan or HELOC, review a copy of each of your credit reports. Home equity lenders use the information in these reports to assess your creditworthiness. Visit annualcreditreport.com to request a free copy of your report from any of the major credit bureaus.
Credit history reports include a summary page that highlights data that is detrimental to your credit profile. Pay close attention to this section and follow the suggestions to improve your balance. If you find incorrect information in your report, follow the credit bureau’s dispute settlement guidelines to make the necessary corrections.
Borrowers with high credit scores have cheaper interest rates than borrowers with average credit scores. When you start with a lower interest rate, inevitable changes in Fed interest rates can be less of a disruption to your finances.
Using a HELOC or home equity loan can be a smart financial move for many homeowners looking to cut costs and save money. However, it is important to have a strategy or purpose in place before borrowing to ensure that the funds improve your financial situation. Without a plan or goal for the stock funds, borrowing against the equity in your home can add to an already tight household budget.
Benefit from higher front range home values and use your home equity to meet a financial need.