Do you need money for home improvements, debt consolidation, or emergency expenses? If you have equity in your home, you may be able to tap into it for cash. But what's the best way to do that? Should you get a home equity loan or a home equity line of credit (HELOC)? Both have their pros and cons, so it's important to understand the difference before you make a decision. Let's take a closer look to see which one is right for you.
What is a Home Equity Loan?
A home equity loan is a type of the second mortgage. You borrow a lump sum of money and pay it back over a fixed period of time, usually five to 15 years. Home equity loans generally have a fixed interest rate, so your payments will stay the same every month. This very factor makes a home equity loan a good choice if you need predictable monthly payments. It's also a good option if you need the entire loan amount all at once and you don't want to (or can't) draw on a line of credit over time. Moreover, home equity loans are often used to pay for major expenses, such as home renovations or medical bills, and you may be able to deduct the interest you pay on your loan from your taxes.
What is a Home Equity Line of Credit (HELOC)?
A HELOC is also a type of the second mortgage, but it works differently than a home equity loan. With a HELOC, you're approved for a certain amount of credit, but you don't actually borrow any money until you need it. You can access the money by writing a check or using a special credit card that's linked to your account. HELOCs typically have adjustable interest rates, which means your payments could go up or down over time. This makes them a wise choice if you need the flexibility to make lower payments now and larger payments later on.
HELOCs are also often used for home renovations because you can borrow the money as you need it, rather than all at once. One thing to keep in mind with a HELOC is that you're essentially using your home as collateral, so if you fall behind on your payments, you could lose your home.
What's the Difference Between a Home Equity Loan and a HELOC?
The main difference between a home equity loan and a HELOC is how you access the money and how and when you have to pay it back. They both typically have lower interest rates than credit cards or personal loans, making them a good option if you need to borrow money. But due to their different features, one may be better suited for your needs than the other.
So, if you're considering taking out a home equity loan or HELOC, it's important to compare your options and make sure you choose the one that's right for you. You may also get in touch with a lender for a mortgage in Toronto to get the best loan option. They will guide you through the process and make it easier for you.
The Bottom Line
To tap the equity, you've built in your home, taking out a home equity loan or HELOC can be a terrific option. But it's important to understand the difference between these two types of loans before you decide which one is right for you. Consider your needs and objectives carefully before you apply for a loan. And if you're unsure which option is best, talk to a financial advisor to get expert advice.