Should I Choose a HELOC or a Home Equity Loan?

When you’re first buying your home, you might think it could be worth something more when you sell it. You’re probably thrilled that you can live in something that will eventually make you money. But is there any way to access that money before you actually sell?

Maybe you’re strapped for cash. Maybe you feel like you don’t have enough money to spend on home improvement, education expenses, or other important investment, and you’re hoping that maybe you can use your home to help pay for it. The good news? You can. And it might end up being a great financial decision.

What Is Home Equity?

You can borrow money against the equity of your home in two different ways, both often called a “second mortgage.” Your two options are a home equity loan or a home equity line of credit (HELOC). While both come with their own pros and cons, you’ll likely find that one of the options better fits your needs and can help you pay for something important without digging yourself into too big of a financial hole.

Since these loans usually have lower interest rates than either a personal loan or a credit card, it’s often a great way to go about securing the money you need. If you plan to use this money to pay for improvements to your home, you can even deduct it from your taxes. Of course, the major risk in this loan is that if you’re unable to pay it over the set period of time, the lender could foreclose on your house. But if you make the right decision and approach your repayment with purpose, this could be a great choice for you.

Most lenders will offer options of both a HELOC or home equity loan. Here at Rivermark Community Credit Union, we’re proud to do the same for our members. With these two options at Rivermark, you can rest easy knowing that there will be no annual fee or any prepayment penalties if you pay your loan back before your time is up.

At Rivermark, you could even borrow up to 95 percent of your home’s equity, so take a look at the information below and consider which option is best for you and then come talk to us about how you’d like to get started on your second mortgage.

What Is a Home Equity Loan?

When you qualify for a home equity loan, you can receive a lump sum at the very beginning of your loan. That means that if you need a large amount of money to pay for something all at once, you’ll have to get approved for the total loan amount now and then pay a fixed rate for the length of the loan.

There are a handful of benefits of going with a home equity loan, but perhaps the most important is that you’ll repay your loan on a fixed monthly schedule. This makes budgeting much easier, making sure you’re never surprised about how much you need to pay during any given month. The loan you can get is based on your house’s value, your credit score, and a number of other factors.

While you’re at risk of losing your home with a home equity loan, you can approach the repayment process strategically so that you can include the loan in your taxes, as well as make sure that your income can cover the monthly payments from the moment you sign on the dotted line. Because of that, a home equity loan is often considered a safe option that can get you however much you need without the risk of going overboard in subsequent months.

What Is a Home Equity Line of Credit (HELOC)?

Your second option is a home equity line of credit, or HELOC. It’s a revolving line of credit that you can access as frequently or as infrequently as you want. It works similarly to a credit card in that you get approved for a variable line of credit, and you only pay interest on how much you borrow from month to month. That means if you’re using this money for home improvement, you can withdraw cash periodically to pay contractors.

However, it also means that you won’t be able to plan how much you’ll have to pay on a month-by-month basis the way you can with a home equity loan. Your monthly payment will rise when you use it.

At Rivermark Community Credit Union, you have a 10-year draw period during which you can continue withdrawing money, but you have extra time to pay for the interest and remaining balance after the draw period is done. This option offers great flexibility for those who don’t need to receive a large sum upfront and for those who don’t mind the unpredictability of increasing rates on a month-to-month basis.

Should You Choose a HELOC or Home Equity Loan?

At this point, you’re probably trying to decide exactly which one is best for you. The answer? It depends. HELOC is easier for flexibility, but home equity loans are better for predictability. If you’re looking to minimize interest, HELOCs are probably a better option for you. If all you need is a one-time loan and you feel nervous about the prospect of unknown growth in your interest payments from month to month, then a home equity loan might be the right choice for you.

Regardless of what you’re thinking now, make sure you talk to a trusted lender and understand everything that will go into making your final decision. You can contact us at Rivermark with your questions. We have both options available to our members, and we want to help you get the money you need while feeling like you’re pursuing the most efficient repayment plan possible. No matter what dream you’re chasing with this second mortgage, we’d love to be the ones to help you get there.