Withhigher than they've been in more than two decades, many prospective homebuyers find themselves priced out of the market. And existing owners are no longer seeing the clear benefit of refinancing that was once available to them. In this climate, it may seem that there are no good alternatives. Current homeowners, however, have one advantage that many others do not: their existing .
By utilizing the equity they've accumulated in their home over many years (or decades), owners can finance major home repairs and renovations at significantly lower interest rates than if they had used credit cards or personal loans. And, if used for eligible purposes, they could even.
There are two popular ways owners can access this equity, among others: aor a . While both operate similarly and can help accomplish the same goal, there are times when one may be better for owners than the other. Accordingly, it helps to know how to make this distinction.
How to decide between HELOCs and home equity loans
Here's when a HELOC is the better choice:
- When you don't know exactly how much you need. Since as revolving lines of credit (like credit cards), they're generally a better fit for when you know you need money but don't know how much you'll actually need. By choosing a HELOC in this scenario, you'll only pay interest on what you use, not the full amount you applied for (it's the opposite case with a regular home equity loan).
- When you're looking for the lowest rate possible. If the interest rate is your sole consideration, then a HELOC is probably better for you. . Granted, a variable rate could quickly become cost prohibitive but if you use it smartly — and only need financing for a short time period — a HELOC may be your best bet.
- When you want the flexibility to keep borrowing. Because HELOCs work the way they do, they're generally a better option for those who want the flexibility to continue to borrow. With home equity loans, on the other hand, borrowers are limited to the amount they applied for and won't be able to go over that amount without adjusting the terms of their application.
And, conversely, here's when a home equity loan may be preferable.
- When you want a locked rate. A locked interest rate, even if it's slightly higher than a HELOC, can still be beneficial for budgeting purposes and peace of mind. While you'll have to pay slightly more in interest, the advantage of knowing that it won't change over the term may be worth it for you.
- When you want a clear end date. Because you have a set interest rate with a home equity loan, you'll know exactly when your loan will be paid off. For some borrowers this may not be a concern, but for others — like — this can be a valuable feature.
- You'll have more time to pay it off. Although not true in all cases, home equity loans generally tend to have a longer repayment term than a HELOC will. This can be a few years or a few decades, depending on the terms of your loan. This can be particularly advantageous if you know that you'll need the money now and for the foreseeable future.
The bottom line
Both HELOCs and home equity loans have unique features that homeowners should consider, particularly when their options to buy a new home or refinance their existing one are limited. While the pros and cons of each are in the eye of the beholder, both home equity types can help owners make major home repairs, renovations and improvements — often at cheaper rates and with attractive tax advantages that other credit alternatives simply do not have.
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