Home Equity Loans vs. HELOCs
Published August 31, 2016
Now that home values are appreciating again, home equity loans are once more becoming popular tools for financing. Last year the home equity balances at credit unions across the U.S. grew by 6.1 percent after seeing 7.2 percent growth in 2014. That’s largely due to pent-up demand, attractive interest rates and borrowers’ ability to deduct such interest on tax returns.
For some consumers, though, a home equity line of credit (HELOC) is easier to secure, and less expensive in terms of interest.
If you’re considering either one, you’ll want to understand the advantages and disadvantages. Rules vary by state, but here’s a brief primer on how each one works in Texas.
About Home Equity Loans
At Amplify Credit Union, these vehicles allow you to borrow a lump sum at a fixed interest rate for a range of purposes, most commonly home renovations, college tuition, debt consolidation, emergency funds or vehicle purchases. Each loan is set up with five- to 20-year terms similar to your original mortgage, with equal monthly payments spread over that time. Your home represents the collateral that reduces risk for your credit union or bank; in Texas, that equity is compiled by determining 80 percent of your home’s appraised value then subtracting the balance on your mortgage. In the rare case of default, it’s possible for you to lose your home.
In Texas, interest rates vary between vendors, interest is tax deductible and additional fees are limited to 3 percent of your loan, though Amplify surpasses that standard by charging no fees at all. The criteria for qualifying involve your credit history, your equity and your income relative to monthly debt obligations. To meet state requirements, approval and processing generally take 30 to 45 days; your funds become available on the fourth business day after your loan closes.
Amplify offers a similar unsecured product called a Homeowner Express Loan, which offers a maximum balance of $40,000 without requirement of home equity, liens or closing costs. The loan of five, seven or 10 years is ideal for homeowners who lack equity and/or need immediate funds.
About Home Equity Lines of Credit (HELOCs)
Amplify can also offer qualified borrowers variable-interest Home Equity Lines of Credit which allow for minimum withdrawals of $4,000. The money can be used for a number of different purposes and is ideal for those with ongoing home renovations.
A HELOC uses your home equity as collateral following the same formula as a home equity loan. It allows for a 10-year draw period during which the borrower can choose to make interest-only payments, or regularly pay off the balance without penalty. Any balance not paid by the end of the agreement can be refinanced into another HELOC or subjected to regular installment payments. Some borrowers use the HELOC to supplement a home equity loan, since the interest is often tax deductible and is typically lower than that of credit cards.
Compare Home Equity Loans and HELOCs
||Home Equity Loans
||Same monthly payment every month; you pay interest on the full loan amount
||Interest-only payments for the first 10 years; pay interest only on what you borrow
||5, 10, 15, and 20 year terms available
||Open line of credit with 10-year draw period; converts to 10-year installment loan after draw period
|Ongoing Access to Funds?
||No; once your funds are spent, you must refinance with additional cash-out
||Yes, during the 10-year draw period; each withdrawal must be at least $4,000
|Availability of Funds at Closing
||Funds available as lump sum, all at once
||Line of credit available; you must withdraw funds to use them
||80% of your home's value, minus your mortgage balance
||50% of your home’s value as long as your HELOC and other liens against the property do not exceed 80% of your home’s value
Interested in a Home Equity Loan or HELOC?
If you're considering going the Home Equity Loan route, Amplify offers terms of 5, 10, 15 and 20 years, with funds available four days after closing and no prepayment penalties on early or extra principal payments. Click here to learn more about Home Equity Loans.
If you're interested in exploring the Home Equity Line of Credit option, allowing you a 10-year draw period followed by a 10-year payback period, click here to learn more about HELOCs.