• Facing a big expense? You might consider tapping into your home’s equity with a home equity loan or a home equity line of credit (HELOC).
• What’s a home equity loan? It’s a way to borrow a lump sum of money using your home’s built-up equity as collateral.
• What’s a HELOC? A HELOC allows you to establish a revolving line of credit based on your home’s equity, giving you flexibility to borrow as needed.
When it’s time to tackle significant financial needs like home upgrades, debt consolidation, or tuition payments, homeowners often turn to their home equity for funding. A home equity loan or a HELOC provides powerful tools for leveraging the value of your property, but each serves different needs depending on your situation.
What Is Home Equity?
Home equity represents the current value of your property minus any outstanding mortgage or liens. Homeowners build equity over time by making mortgage payments and as property values rise. Improvements to your home or shifts in your local real estate market can also influence how much equity you have.
If you’re curious about calculating your equity, TechLoans offers a simple tool to help you get started. Explore our calculator here.
What Is a Home Equity Loan?
A home equity loan is a financing option where you receive a lump sum secured by your home’s equity. It’s commonly referred to as a second mortgage and is ideal for homeowners who need a set amount of money upfront.
Key Features of a Home Equity Loan:
• Fixed interest rates and predictable monthly payments.
• Loan terms typically range from 5 to 15 years.
• The amount you qualify to borrow depends on your home’s equity and creditworthiness.
However, borrowing against your home comes with risks. Missing payments could lead to foreclosure, meaning the lender could take possession of your property to recover the debt.
Pros and Cons of Home Equity Loans
Advantages:
1. Lower Interest Rates: These loans often come with rates lower than those of credit cards or personal loans since your home serves as collateral.
2. Larger Borrowing Potential: Home equity loans typically provide more funds compared to unsecured loans.
3. Tax Deductibility: Interest may be tax-deductible if the funds are used for home improvements.
Disadvantages:
1. Risk of Foreclosure: Failing to repay the loan could result in losing your home.
2. Market Volatility: If property values drop, you may owe more than your home is worth, leaving you “underwater.”
3. Closing Costs: Fees and other costs can add up, often ranging from 2% to 5% of the total loan amount.
What Is a HELOC?
A home equity line of credit (HELOC) gives you flexible access to funds. Instead of a lump sum, it provides a revolving line of credit, allowing you to borrow only what you need, when you need it.
Key Features of a HELOC:
• Variable interest rates, which may fluctuate over time.
• A draw period (commonly 10 years), during which you can borrow funds.
• After the draw period, the loan enters a repayment phase, often lasting 20 years.
The HELOC Advantage:
With a HELOC, you only pay interest on the amount you actually borrow, making it a cost-effective choice for ongoing expenses like college tuition or home projects that occur in phases.
HELOC vs. Home Equity Loan: Which Is Best?
Choosing between a home equity loan and a HELOC depends on your financial needs:
• If you need a one-time lump sum, such as for a major renovation, a home equity loan might be the right choice.
• If you prefer the flexibility to borrow over time, like funding education or managing unexpected costs, a HELOC offers more versatility.
At TechLoans, we believe in empowering homeowners with clear, affordable options. To find out which solution suits your goals, visit our HELOC vs. Home Equity Loan guide.
Requirements for Approval
Whether applying for a home equity loan or a HELOC, lenders will evaluate several factors:
1. Equity in Your Home: Most lenders require you to have at least 15%-20% equity before borrowing.
2. Debt-to-Income (DTI) Ratio: Lenders prefer a DTI ratio under 43%, so managing your debts is crucial.
3. Creditworthiness: Strong credit scores (typically 700+) increase your chances of approval and unlock better interest rates.
Getting Started with TechLoans
At TechLoans, we make it easy to access your home’s equity with low rates, fast approvals, and customized loan options. Whether you’re looking for a lump sum or a flexible credit line, our platform is designed to meet your needs quickly and efficiently.
TechLoans: Empowering homeowners to achieve their financial goals with confidence.
Start your application today or contact us at 855-948-6355 for personalized guidance.