Home equity line of credit (HELOC) and Home equity loan both allow you to borrow money by using your house value as collateral for a loan. Both organizations though they perform the same functions, have a few differences. HELOC allows you a spending limit that you can borrow against and payback in a different amount, just like a credit card. However, a home equity loan gives a lump sum that is paid back in fixed, equal installments.
What really is a Home Equity Line of Credit (HELOC?)
HELOC provides individual direct access to a pool of money- the burrowing limits- the credit line that enables you to draw from when needed, either by making changes, writing checks, or making cash withdrawals using a designated card. You don’t have to make any payment or any interest until you use your card. When using your card, you can make payments of any sum so far you meet up with the monthly minimum to repay the existing balance as quickly as possible. Any delay in payment balance will result in additional interest charges.
Compared to a credit card account that stays open so far you continue making payments, a HELOC has a designated lifespan which is divided into two phases:
- The repayment period
It is impossible to borrow against the credit line during this period, and it is essential to pay up the outstanding balance. The designated period for payment lasts for 20 years.
- The draw period
This method of account can be used to borrow and repay the money quickly. Unlike the repayment method, this period lasts for only ten years, then the loan transfers to the repayment period.
The HELOC loan agreement states the length of your draw and repayment period, and the interest rate on HELOC’S is seldom variable.
What is Home Equity Loan?
This is referred to as a lump sum a person borrows against the equity in their home. This type of loan is sometimes called a mortgage. Compared to a primary mortgage, a home equity loan can be secured by your home. This means that the lender can choose to seize your property if you do not meet your repayment deadline as contained in the agreement.
The annual percentage rate (APR) on home equity loans starts at 3% and rises to 12% or even more. Like interest rates, on loans, the rate you may qualify for will vary on factors, including your current credit score (with bigger scores having lower interest rates), income, and the amount you spend on other debts every month.
Differences between HELOC and Home Equity Loan
The primary difference between HELOC and Home Equity loans depends on how you receive and repay the amount borrowed. Regarding how you intend to make use of the burrowed sum, one or the other may be easily affordable in cases of interest charges. With the home equity loan, you get the total loan amount as soon as the loan is approved. It is also necessary to repay it over a stipulated number of fixed monthly repayment.
HELOC helps you save on interest charges only if you restrict your withdrawals and pay your balances between expenditures. If you want to deduct interest payment on HELOC, you may need to file your federal income tax, just like you file for mortgage interest charges.
Whether you choose a Home equity loan or HELOC, the more prominent role depends on your credit, as this is a vital factor in how much it will cost. It’s advisable to access between duration of 3 to 6 months before tendering that application. Contact Canadian Approval Center at any time and we can help you with the best possible solution for your requirements.