Home equity: loan or line of credit?
That is the question.
If you're in a position to choose between a HELOAN (home equity loan) and a HELOC (home equity line of credit), first of all: congratulations. You've worked hard to build equity in your home, and now you can reap the benefits.
But how do you know which option is best for you? Let's dive in.
How much equity are you able to borrow against?
With most lenders, you can borrow up to 85% of the current appraised value of your primary residence minus the balance of your mortgage.
So, if your home was appraised at $400,000, and you owe $220,000 on your mortgage, then:
$340,000 [85% of your home's appraised value] - $220,000 [your mortgage balance] = $120,000 [the amount you may be able to borrow]
What is a HELOAN?
A home equity loan works like your mortgage or other loans. You borrow a specific amount, then make regular monthly payments with a fixed interest rate during a predetermined repayment period.
What is a HELOC?
A home equity line of credit works more like a credit card. You have a credit limit that you can access during the borrowing period, which is typically 10 years. Like a credit card, when you pay back some or all of what you borrowed, you replenish the credit limit you can borrow from.You only pay interest on the money you borrow, not the entire limit, and only pay interest once you access that money.
What do HELOANs AND HELOCs have in common?
For both HELOANs and HELOCs, the interest rate is often lower than other types of loan rates because the rate is based on collateral (your home) instead of your income and credit rating.
For both, if you use the money you borrow for home improvements, the interest may be tax-deductible.Footnote1
For both, you may be able to borrow up to 85% of your home's appraised value minus your mortgage balance.
What differentiates them?
With a HELOAN, you receive the entire amount you borrow in a lump sum. With a HELOC, you have a credit limit and can borrow as much (or as little) of that as you need over the course of the borrowing term.
Most HELOANs have fixed interest rates, and most HELOCs have variable interest rates. Some HELOCs (including those offered by Bank of America) give you the option of converting a portion of the credit line to a fixed rate.Footnote2
With HELOANs, you pay interest on the entire amount borrowed. With HELOCs, you only pay interest on the amount of your limit that you use.
What can you use the funds from HELOCs and HELOANs for?
Which one is right for you?
The major deciding factors in the choice between HELOAN and HELOC are 1) how immediately you'll spend the funds, and 2) how certain you are about the amount you'll spend.
For instance, if you're putting in an in-ground pool, a HELOAN is probably the better choice because you'll need the lump sum of money to pay for that project, and because you know the total cost of the project ahead of time.
If you've decided to do a series of home improvements over the next few years, a HELOC works best because it gives you the flexibility to only spend what you need when you need it. Plus, you don't pay interest on the money until you actually access it.
A note from your lending specialist
If you'd like to know more about accessing the equity in your home, I can help you review your options and get the funds you need.
1 Please consult your tax advisor regarding interest deductibility.
2 Fixed-Rate Loan Option at account opening: You may convert a withdrawal from your home equity line of credit (HELOC) account into a Fixed-Rate Loan Option, resulting in fixed monthly payments at a fixed interest rate. The minimum HELOC amount that can be converted at account opening into a Fixed-Rate Loan Option is $5,000 and the maximum amount that can be converted is limited to 90% of the maximum line amount. The minimum loan term is 1 year, and the maximum term will not exceed the account maturity date. Fixed-Rate Loan Option during loan term: You may convert all or a portion of your outstanding HELOC variable-rate balance to a Fixed-Rate Loan Option, resulting in fixed monthly payments at a fixed interest rate. The minimum outstanding balance that can be converted into a Fixed-Rate Loan Option is $5,000 from an existing HELOC account. The minimum loan term is 1 year, and the maximum term will not exceed the account maturity date. No more than three Fixed-Rate Loan Options may be open at one time. Rates for the Fixed-Rate Loan Option are typically higher than variable rates on the HELOC.
3 The relative benefits of a loan for debt consolidation depend on your individual circumstances. For example, you may realize interest payment savings by making monthly payments towards the new, lower interest rate loan in an amount equal to or greater than what was previously paid towards the higher rate debt(s) being consolidated.
MAP5093224 | 11/2022