Home Equity Loans vs. HELOCs: Which is Right for You

Ken Weingarten |
Categories
Cash Flow Planning
Financial Planning
Debt Management

Using one’s home as collateral when taking on debt has its pros and cons. On the one hand, you may qualify for lower interest rates, but on the other hand, your home is on the line if the debt is not paid. While both Home Equity Loans and HELOCs can achieve similar ends, there are significant differences between the two that can favor one over the other. Below we go over the differences and what types of scenarios to consider one type of loan over the other.

Home Equity Loan

Using your home’s equity as collateral, these types of loans operate under similar rules like a typical mortgage – fixed payments for a fixed period of time. Factors such as credit score, equity, and outstanding mortgage balances will affect how much can be borrowed.

Typically, one should consider this type of loan when trying to finance one-time, large expenses such as a home renovation project, college tuition, or debt consolidation. Online calculators such as this one can help provide you a better idea of what your options are if you are considering this type of loan.

HELOC

While HELOCs function in a similar fashion where your home’s equity is put up as collateral, this type of loan functions more like a credit card as you can access the available funds intermittently. Unlike a Home Equity Loan, monthly payments and the interest rate of a HELOC are variable and dependent on the line balance.

While HELOCs can be used to cover the aforementioned expenses in the Home Equity Loan section, a HELOCs flexibility can be taken advantage of if one finds themselves with unexpected costs that an emergency fund may not be enough to cover.

 

Both types of loans are good choices for many individuals who may need the extra financing. A big-picture question to ask oneself before choosing one type of loan over another is “What financial goal are you trying to accomplish?” Understanding your financial situation and setting priorities in your goals can help you make an informed decision on what type of loan is right for you (or if a loan is even necessary). Having a financial advisor on your side can help you evaluate these options.

 

Weingarten Associates is an independent, fee-only Registered Investment Advisor in Lawrenceville, New Jersey serving Princeton, NJ as well as the Greater Mercer County/Bucks County region. We make a difference in the lives of our clients by providing them with exceptional financial planning, investment management, and tax advice.