Posted by Cash out home equity with a HELOC or HELOAN. Two similar yet different loan options to tap into home equity.
Pulling Cash Out Using a HELOC or HELOAN
Today’s homeowner has more home equity thanks to historic home value gains. HELOCS (Home Equity Line Of Credit) and HELOANS (Home Equity LOANS) give homeowner’s access to their equity while preserving the low rate on their first mortgage.
HELOCS and HELOANS help homeowner’s pull cash for debt consolidation, home improvements, investments and more. While the 2 loan options are similar they have some key differences as well.
What Is The Difference – HELOC vs HELOAN
While HELOCS and HELOANS allow homeowners to pull equity out of their homes that is the extent of their similarity. The 2 equity tapping tools differ in a few key ways.
Open Ended Vs. Closed Ended
A HELOC provides homeowners with an open ended line of credit. Think of an open ended line of credit like a credit card. The balance fluctuates as the owner pulls more credit and goes down as they pay the balance off. While that sounds like most loans, the difference is that the monthly payment also goes up and down based on the current outstanding balance. Also, the borrower may continually borrower, pay down and then borrower funds again on an open ended line of credit.
A HELOAN provides homeowners with a closed ended loan. Closed ended loans (also referred to as “installment loans”) work like standard first mortgages. Even though they are 2nd mortgages, HELOANS provide a fixed loan amount and monthly payment. Borrower’s can not pay down and reborrow against a HELOAN.
Fixed Vs. Variable Interest Rate
A HELOC’s interest rate is variable. This means the interest rate moves throughout the life of the HELOC. As a result, the monthly payment fluctuates based on the variable interest rate as well as the HELOC’s balance.
A HELOAN’s interest rate is fixed. This means a HELOAN’s interest rate remains the same during the life of the HELOAN. Therefore, the monthly payment for a HELOAN stays the same for the entire loan.
Picking The Right Home Equity Loan
It is important each homeowner uses the best home equity loan for their unique situation. From the amount of money needed to the timeframe the loan will be paid back several factors go into finding the best home equity tool. In fact, current interest rate conditions and Fed cycling should also be weighed into the overall decision.