Our home is one of our major investments. This provides us shelter. In addition to that, owning a home offers a lot of benefits. One is being able to borrow against its value. This is made possible by different home equity borrowings such as home equity loans (HEL) and home equity line of credits (HELOC). Both modes of borrowings are insured by the homeowner’s property. They have several similarities. However, they have more differences.
If you wish to borrow using your home equity, you need to understand which to use. Take your time in considering essential factors because this will put your home at risk. Here are individual discussions of HEL and HELOC.
What is HEL?
This is a type of loan that uses the property as the collateral. Just like the mortgage loan, you will also need to pay closing cost. However, this will be lower than your first mortgage. Once the lender approves your loan, you will receive a lump sum amount, which is more or less than the value of your home. This will depend on the evaluation of your application.
In order to qualify you need to provide the requirements your lender ask. This is usually comprised of your pay slip or any proof of income, additional financial statements, a proof that you have paid at least 20% of the mortgage and the appraisal of your home.
Payment for the loan is monthly. The interest rate used maybe fixed or adjustable. If it is fixed, the monthly payment you will make remains the same throughout the life of the HEL. This is advantageous because you will know exactly how much you need to prepare.
What is HELOC?
The other type of home equity borrowing is the home equity line of credit. There are several aspects that differentiate it from HEL. First, you will not receive a lump sum amount for the amount borrowed. Instead, a line of credit will be available for you and you can use it anytime you want to. This works like any revolving credit such as credit card.
The requirements to qualify for this are similar with the HEL. There is a need to present a proof of income as well as a proof of homeownership. Likewise, the lenders may also require an appraisal of the property.
The monthly payment is different from HEL too. The interest rate used here depends on a prime rate and the margin added by the lender. This makes it unpredictable which is why you need to use this line of credit cautiously. The amount you will pay will depend on the amount that you have used. You can pay off the entire amount you have consumed or you can just pay its interest. However, this arrangement will not last forever. Eventually, you will be required to pay off the entire amount you have used and the additional interest.
It is important that you are aware of the different financing available for your home equity. Through this, you will know your options should you need to borrow money. It is also crucial that you choose the right mode of borrowing that suits your need. Remember, you will lose your home if you fail to pay the amount you owe.
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