The Difference Between a Home Equity Line of Credit and an Equity Loan

Homeownership provides a potential source of borrowing power, as once you build up home equity, you can tap it as a source of funds when you need money.

The equity – the difference between your home’s fair market value and the balance on your mortgage – can offer some of the lowest-cost lending available, through either a home equity loan or a Home Equity Line of Credit (HELOC).

Home equity loans:

Simply put, it is a second mortgage that allows you to access real estate equity in one lump sum. After the loan closing, the lender either cuts a cheque for a lump sum or wires the funds to the borrower.

If you own a home worth $300,000 with a $200,000 balance on your first mortgage, for example, you would potentially be able to tap $100,000 in equity.

Some home equity loans allow you to borrow up to the full 100 percent of your available equity, while others cap the loan at 85 percent, 90 percent, or 95 percent. Home equity loans usually come with fixed interest rates.

HELOC loan:

Different from a home equity loan in that you can borrow only what you need now, but potentially take more later. The credit line is similar to the available credit on a credit card, where you pay interest only on the money you’re using. Your loan payments would be based on the outstanding balances from all your draws from that line.

Your lender will make the HELOC available to you under a “draw period” which will then be followed by a repayment period. You would not be allowed to take out more money from your HELOC during your repayment period. Unlike home equity loans, a HELOC is usually offered with a variable interest rate.

How to repay them:

With either option, your repayment can be amortized, meaning it is scheduled out over a period of time, with interest and principal included in your instalments. Under a ten-year amortized home equity loan for $100,000, your monthly payments would gradually take your balance down to zero. One variation to be aware of, is balloon payments – one large payoff amount that may be due at the end. Each borrowing method allows low-cost access to the value that you’ve built up in your home.

Read more about this here: https://calgarysun.com/moneywise/heloc-vs-home-equity-loan

Posted by Kevin Sharpe on
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