Purchasing a home comes with more benefits than just having a place to live. With a mortgage, each time you pay your monthly payment, you build equity. Equity is a valuable financial asset that can be accessed as a lump-sum loan or a line of credit once you pay off at least 20% of your mortgage. Equity can be used in two different forms, a home equity loan or a home equity line of credit using your home as collateral. Both are highly beneficial but knowing the difference between the two, and when to use one over the other, can make a major difference in your experience. Learn with mortgage lenders in Philadelphia to find out if a HELOC or a home equity loan is right for you.
Home Equity Line of Credit (HELOC)
A home equity line of credit, or HELOC, is a revolving line of credit that has varying interest rates and minimum payment amounts. This form of credit allows homeowners to use their equity as needed up to the preset maximum limit. HELOCs work sort of like credit cards but are instead backed with your home as collateral. Unlike credit cards, both HELOCs and home equity loans generally have more favorable interest rates. HELOCs are broken down into two parts, the draw period and the payback period. The draw period is when the borrower can withdraw funds up to a certain pre-set limit. Once the draw period is over, the repayment period lasts for several more years or until the amount borrowed is repaid in full with interest back to the mortgage lenders in Philadelphia. During the draw period, payments are typically just the interest. During the payback period, borrowers will pay back the interest plus a set amount based on the amount borrowed.
Home Equity Loan
A home equity loan is similar to a HELOC but instead of having access to a line of credit you receive the loan as one lump sum. It has fixed terms and is also based on the equity in your home. When applying for a home equity loan, the borrower proposes a set amount and, if approved, receives the loan all at once. Both the interest rates and the payments are set at fixed amounts, making the payments predictable. A home equity loan can typically be as high as 80-90% of the home’s appraised value.
Requirements for Eligibility
To gain access to your home’s equity, in either a HELOC or a home equity loan, you must first have paid at least 20% of your mortgage off. In most cases, you will also need a credit score of 600 or above. High-risk mortgage lenders in Philadelphia are available to those with lower credit scores, however, they come with much higher interest rates. Finally, you must be able to prove a stable income for at least 2 years prior to requesting the loan or HELOC.
Pros and Cons of HELOC
With HELOC, you get to choose how much of your credit line to use. If you are financially disciplined, this is a benefit of a HELOC but, if you are prone to impulse spending, you could potentially overspend your credit limit and risk losing your home. With variable interest rates, your interest rate could decrease if the market or your credit improves. This also means that there is a chance for your interest rates to increase due to changes in your credit or the market. Another pro with a HELOC is the ability to use the line of credit in case of an emergency. Finally, with fluctuating payments, budgeting can become difficult.
Pros and Cons of Home Equity Loan from Mortgage Lenders in Philadelphia
Home equity loans are based on a fixed amount, making irresponsible spending less likely and making budgeting easier. With other forms of lump sum loans, the interest rates are significantly higher than with a home equity loan. Having a large loan readily available opens your opportunities for investing, home improvement, and anything else that would require a large payment. Adversely, home equity loans are only provided all at once, meaning that if an emergency were to arise, you would not be able to access additional funds. In order to get a lower interest rate for your home equity loan, you would need to refinance. As with HELOCs, you risk losing your home should you default on your payments.
When To Use a HELOC
As a revolving line of credit, a HELOC can be effectively used to pay off variable expenses. If you want to have a line of credit available for any potential circumstances that would require additional funds, a HELOC is a great reserve for emergencies. HELOCs should be avoided if you cannot control your spending but are highly beneficial financial tools for those that can spend efficiently within a variable budget. If you are thinking about getting another credit card, consider a HELOC, as their interest rates and terms are usually much better for the borrower.
When To Use a Home Equity Loan
A home equity loan is a great option if you are aware of the exact amount that you require for a fixed expense due to the ability to request a certain amount within the capacity of your home’s equity and property value. If you have debt that you wish to consolidate but don’t want to risk more debt by opening up another line of credit, a home equity loan can be used to pay off your existing debt with more favorable terms. With home equity loans, you make payments based on a predetermined monthly amount, making it easier to budget on a fixed income. Be sure to discuss your home equity loan plan with mortgage lenders in Philadelphia to gain a comprehensive understanding.
Get the Most Out of Your Home Equity With Professional Mortgage Lenders in Philadelphia
Are you interested in getting the most out of your home equity? Federal Hill Mortgage is here to help. Our team of experienced mortgage brokers and lenders will provide you with professional guidance at every step of the mortgage and equity process so that you can get access to better interest rates and more favorable loan terms. As one of the highest-rated mortgage lenders in Philadelphia, we are confident that we can benefit you and your home-buying experience. Call or contact us today to find out the difference that Federal Hill Mortgage can make in all of your mortgage endeavors.