Are Home Equity Loans and HELOCs the Same Thing?
Considering the two types of home equity release? We investigate what will better suit your financial circumstances.
If you are looking to unlock the potential funds tied up in your property, then there are two main ways to do this. There is the Home Equity Loan, which is sometimes called a Home Equity Release, and a HELOC. We are lucky to be living in a time when we have so many options for funding big projects, but these are the two we will talk about today. Why? There is a lot of confusion about the differences between the two.
Let us talk about what they are, and which works best for you.
What is a Home Equity Loan?
Although both types let you free up collateral using your home, the Home Equity Loan is the only one which is a one time lump sum payment. It is borrowed from a branded lender, usually a bank, and is paid all at once into your account. You are free to spend that money as you wish. Typical reasons for taking out a loan in this way include paying of tuition or school fees, buying a new car, or having a home refurbishment project completed.
The Terms of Home Equity Loans
A Home Equity Loan is a traditional type of lending. It offers a fixed interest rate where you repay the same amount every month. You are given the money you have borrowed to spend as you would like, and the repayment terms begin from the moment you sign your contract.
For whom are they Best?
Home Equity Loans work best for those that know exactly how much they want to borrow. If you have an exact cost on the item you wish to buy with the loan, or if it is a one-time payment, then using a home equity loan may be best for you. If you are borrowing for the likes of a construction work project, which might go over budget, consider a HELOC instead.
What is a HELOC?
HELOC stands for Home Equity Line of Credit. A HELOC is new to the UK. There are not many companies offering them, so we used the model provided by Selina Advance. A HELOC allows you to borrow up to 80% of the worth of your home. This is released to you as a set amount, which you can borrow up to, but not over. You will only repay the interest on what you use.
How HELOCs Work?
So, with a HELOC, you might need £20,000 for a brand new kitchen. However, you pay a one time product fee for your whole home, so if it is worth £100,000, you unlock the borrowing potential of £80k. If your project runs over budget, you can then go back and borrow as much more as you need to finish it. This way, you only pay for one product, you do not need to reapply for a loan, and your credit rating isn’t affected.
Do I Need a HELOC or a Home Equity Loan?
If you are borrowing a set sum of money, a Home Equity Loan may be best for you. If you are borrowing and might overrun a budget, a HELOC is best. We would err on the side of caution and advise the HELOC. It is simply good common sense.