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Home Equity Loan vs. Line of Credit

If you need money, a loan using your home as collateral is probably better than borrowing money from your grandparents or friends. You can begin using a home equity loan or a line of credit as an option once your loan balance falls below the value of your home.

Loan amounts come down to a house's current market value and the remaining mortgage balance you (the homeowner) owe. This solution often comes with less interest than other forms of debt, such as credit cards or personal loans. A lien is placed on your home as a mortgage loan.

HELOC

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Based on credit, income, and loan to value requirements, you may be eligible for a Home Equity Line of Credit (HELOC). This revolving line of credit allows borrowers to continually take out additional amounts up to a specific loan balance outlined by lender.

The first 5 years of a HELOC loan are known as the “draw years.” These are the years where only interest payments are required and payments towards the principal are optional. If payments towards the principal balance are made, then you can continue borrowing until you reach your specified loan limit.

Once the 5-year draw period for a HELOC ends, the repayment period begins. This means you will no longer be allowed to withdraw funds on your line, and you will be required to make monthly payments that now repay both principal and interest balances during this new period. The repayment period will last 10 years and will be set up on a payment schedule provided by your lender.

The rate for an HELOC can fluctuate by generally using the prime rate set by the Federal Reserve. The rates are variable, meaning your monthly payments can be higher or lower depending on economic factors, such as inflation or unemployment.

Home Equity Loan

What are home equity loans, also known as a second mortgage? This option will give borrowers a lump sum that needs to be repaid over 5, 10 or 15 years. As opposed to HELOC's, the interest rate for this loan will remain fixed over the term of the loan.

For people who know how much they need to borrow for more expensive purchases, such as large home improvement projects, debt consolidation, and college, a home equity loan is a great choice.

How Long Does a Home Equity Loan or HELOC Take?

Home Equity Loans and HELOC’s generally require 30 days to process from the time of loan application to the time the borrower receives the money in their account or availability to draw funds from the line of credit.

If you finish paying off your loans early, then home equity loans will typically not charge a pre-payment fee.

If you're preparing for a big purchase or just to free up some extra money, a HELOC or home equity loan might be perfect for you. Just be sure to know the advantages and disadvantages of these two options that can provide some financial assistance. And to learn more about obtaining a HELOC or home equity loan from Oklahoma Central Credit Union, get in touch today.
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