Human beings are dependent on various sources to get financing for various needs. In most instances, if you own a property you will often choose to use it as a security for financing. Among the top, most preferred financing options preferred by homeowners are home equity loans and Home Equity Line of Credit also known as (HELOC). Here we look at the difference that exists between a home equity loan and Home Equity Line of Credit (HELOC).
The market value of an interest that an owner of land has in his or her indebted piece of land is what is legally referred to as home equity. This is usually determined by finding the difference between the current market value of the property and the amount owed in debts. These debts in most instances can be bank loans. This means that if you own property like a home you can always use it to take up a loan whereby the loan you get is referred to as a home equity loan. HELOC, on the other hand, is the provision of funds to in this instance a homeowner, wherein he or she gets financing to a certain extent using their land or property as collateral.
Home equity loans can go up to the credit limit and the terms of payment are fixed by the lender. The credit limit is often accessed using various factors and most importantly the ability one has to repay the loan. Also, the sum owed in a home equity loan has to be paid as agreed and in most instances, the payment is made in fixed monthly installments. HELOC, on the other hand, tends to be more flexible for most lenders because they are given the freedom to adjust the repayment terms in the event situations change. The amount given is in most instances a lump sum amount that is paid upfront to the lender.
The interest charged by the bank on the part of home equity loans can vary from time to time. Governments from time to time might come up with new interest loan rates. This forces the lender to adjust the interest payable either upwards or downwards. With HELOC the interest rates are fixed because the agreement is solely between the bank and the individual. This is why the terms of payment can easily be adjusted because the agreement is more mutual. As stated, on the part of home equity loan the payment terms have to be on the amount advanced to the individual. This means that they are fixed. For, HOLEC the payment can be fixed for a given duration of time and then change with time depending on the agreement the two parties have.
As earlier on stated for an individual to find what their home equity is, they will have to find the current market value of their home then subtract the loan owed from that amount. As one continues with payment of the loan, their home equity increases. Before the lender advances a home equity loan to an individual a loan to value ratio has to be conducted so that the credit limit can be determined. This way the lender gets to access the risk they face by advancing a particular amount of money to an individual. This ratio is found by comparing the current market value of the property against the loan sought.
When dealing with HELOC as a client you will realize that you have a draw period. This can go for as long as agreed between an individual and the lender. Then at the lapse of the draw period, it is a requirement that an individual settles any outstanding balance. HELOC is best known to come in handy where one has projects that run after a certain duration. It could be that you need to improve your home after a certain duration of time. This means that you might need money from time to time. It can either be a lump sum or a few dollars. Some people even take a HELOC to finance their college fees and get to pay later. This looks like the ultimate plan for those that are looking for particular sums of money once after every period.
As much these two loan plans have their differences, they can come in handy in your life dependent on the needs that you have at the specific time. It is important to weigh which plan is most favorable for you so that you make an informed decision. With proper consultation, an informed decision can always be reached.