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With the increase in home values across the country over the past couple years, you may have heard more buzz lately about “HELOCs” and “HELOANs.” They’re hot topics right now, as many homeowners are opting to stay put in their current homes rather than move in this high interest rate environment, and don’t want to give up their current rate through a cash-out refinance.
Both of these home financing options involve tapping into the equity in your home, generally up to 80-95% combined loan-to-value (CLTV). But do you know the difference between these two loan types? Let’s compare!
A Home Equity Line of Credit, or HELOC, allows you to use up to a certain amount of the available equity in your home over a fixed period called the ‘draw period’ (often 10 years). Like other revolving lines of credit, like credit cards, you can spend as little or as much of the available funds as you want up to an established credit limit during the draw period. As with credit cards, you must make minimum monthly payments on your outstanding balance throughout the draw period, but you can also pay it off in full during that time. At the end of the draw period, you will enter into a repayment period (often 10-20 years).
While most HELOCs have a variable interest rate that can fluctuate from month to month, you only pay interest on the funds you use. Moreover, according to BankRate, the current average rate range for HELOCs is 9.34%-12.28%, while Forbes reports the average credit card APR is well over 20%. This can make a HELOC an attractive alternative to credit cards for anticipated – or even surprise – expenses.
A Home Equity Loan, or HELOAN, is essentially a ‘second mortgage’ of a fixed amount that is paid out in a lump sum at closing, as opposed to a revolving credit line. Borrowers make monthly payments on their HELOAN, just like their first mortgage, for a fixed period – typically 5, 10, or 15 years.
Most HELOANs have a fixed interest rate and while it may be higher than the prevailing 30-year fixed rate, it’s typically lower than the rate for a HELOC.
Because you must apply for a fixed sum and will pay interest on it whether you use the money or not, HELOANs may be ideal for large known expenses like home renovations, or for paying down other high-interest debts like credit cards.
Contact an Axia Loan Originator to determine if a HELOC or HELOAN would be right for you.
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