The simplest definition of home equity describes when you owe less on your home loan than your home is worth. Between your down payment and the monthly payments, you have been increasing your equity since you purchased your home. In addition, home values have a long-term tendency to rise, so your home over time becomes worth (sometimes considerably) more than you still owe on your mortgage. That difference is the equity in your home. A home equity loan uses your home as its collateral, just as your mortgage does.
The two home equity options have several things in common. For example, both loan options limit total lien balances against your property capping at around 80% of the value of your home (some states allow as much as 90%). They both also charge interest on the disbursed amount, with your home equity loan payments being set when the loan is originated, and the HELOC payment varying as the amount drawn on it rises. In both cases, the interest may be tax-deductible.
The clear difference between them is in the availability of the funds. With the HEL, you have all of the money up front, and your payments will be based on the outstanding balance from the beginning. With the HELOC, you will find some rules in place for the amounts you take out, but you are only paying on the amount you have drawn against the line-of-credit.
In the table below, is a comparison between ITCU’s home equity loan and HELOC that can help you to make your decision. Be sure to check out our current Home Equity Loan rates and HELOC rates.
|Feature||Home Equity Loan||Home Equity Line of Credit (HELOC)|
|Funds Distribution||Funds disbursed in one lump sum||Available funds can be used as needed, but must advance a minimum of $100 ($4,000 in Texas) at a time.|
|Access to the funds||Deposited in your CU account or by check to the member.||In person, by phone or in writing, Online Banking and MoneyLine.|
|Borrowing Limits||This loan, plus any other outstanding, liens may not exceed 90% (80% in Texas) of the home’s fair market value.||This line of credit, plus any other outstanding liens, may not exceed 90% (80% in Texas) of the home’s fair market value|
|Monthly Payment||Monthly fixed payment amounts.||Monthly variable payment amounts – depends on balance advanced and changes in the APR.|
|Interest Rates||Fixed Rate.||Variable rate (Index plus margin = APR) adjustable during its term on the 1st day of each calendar quarter.|
|Interest Charges||Interest accrues on the outstanding loan amount from the day of closing.||Interest is charged only on the outstanding balance and accrues from the date of advance.|
|Tax-deductible interest||Interest may be tax deductible. Consult a tax advisor.||Interest may be tax-deductible. Consult a tax advisor.|
|Terms||5, 10 or 15 year terms with a fixed payment amount.||5 year draw period requiring payment of interest only each month and repayment periods of 5, 10 or 15 years.|
The decision on choosing a line (HELOC) or lump sum (HEL) loan ultimately comes down to your unique situation. In the case of HELOCs, the credit line is quite useful for projects that are potentially variable in their pace, cost, and likelihood of completion. Home improvements are a consistent winner for HELOCs, since they can accommodate contractors’ fluctuating schedules, and changeable materials costs.
If your project or expense has a fixed cost, however, and the schedule is firmly set, then the HEL might be the better route to go. You will have the money disbursed at once and can pay for your expenses on your schedule.
Whether you choose the home equity loan or the home equity line of credit, your credit union has both the financial instruments and the expertise to guide you through the process. Be sure to discuss your project, timeline, and payment plans with your credit union loan expert, as their experience can help you to recognize the possibilities for choosing how to use your home equity best.