Home Equity Loans and HELOCs: What’s the Difference?
As a homeowner, it’s great to see your monthly mortgage payments inch closer to the end of the amortization schedule. But you don’t have to wait until you reach a zero balance to get excited.
That’s because with each mortgage payment you make, you’re building something that can be golden: Home equity. It’s defined, in part, as the amount of your home that you actually own. Your ownership is built through monthly payments combined with the appreciation of the assessed value of the property. You can calculate equity by subtracting your loan balance from the value of your own.
For property owners in Texas, credit unions like RBFCU offer two ways to leverage home equity into working capital to use for a number of purposes, including refinancing your home mortgage or consolidating loans. Home equity lines of credit (HELOC) and home equity loans sound the same, but there are differences. They look like this:
Home equity loan vs. HELOC: Which option is right for me?
How are the funds dispersed?
Home equity loanYou’ll have immediate access to a one-time amount — a lump sum. This works if you know the exact amount you need.
HELOCThis is an option if you don’t know exactly how much you’ll need right away. It leaves the door open to access more funds over a period of time.
How to use my equity?
Home equity loanYou can use it for debt consolidation, refinancing your existing home loan, tuition and small home improvements.
HELOCUse it for emergencies, ongoing home improvement, pay off debt, pay some tuition rates and “flip” houses.
Home equity loanOptions include 4, 7, 10, 15, 20 and 30 years.
HELOCThey can be drawn against for 10 years, and repayment goes up to 15 years.
Fees and payments
Home equity loanThere are minimal closing costs for loans less than $125,000, no application fee and no prepayment penalties.
HELOCThere are minimal closing costs for loans less than $125,000, no application fee and no prepayment penalties.
Home equity loanAPRs are noticeably less than many loans available through a financial institution.
HELOCAPRs are mostly in line with traditional mortgage options.
If you are thinking of tax benefits from these loans, be careful. The IRS has advised taxpayers that interest on a home equity loan, HELOC or second mortgage cannot be deducted in every case. Interest from these loans are typically deductible when the funds are applied to building an addition to an existing home. Interest on the same loan when used to pay personal living expenses, such as credit cards, is not. It is recommended to speak with a CPA or tax professional when tax laws are considered for home equity loans or HELOCs.
Home equity loans and HELOCs are subject to credit approval. Rates and terms are subject to change without notice. As a safeguard, a 5-day cooling-off period is required by Texas law before home improvement loans may be closed. A 3-day right of rescission is also required after closing before the funds may be disbursed. All RBFCU mortgage loans are available only on property in Texas. Home equity loans and HELOCs are available only on your primary residence. NMLS# 583215.
This information is intended to provide general information and should not be considered legal or tax advice. Please consult a tax professional for more information.