Consumers who own a home have two financial products at their disposal. A HELOC offers a line of credit, and a home equity loan provides a full loan value. The choice between the products depends on how the consumer intends to use the funds and what restrictions apply. When making the choice between the products, consumers compare them and determine what financial product meets their needs.
How Much is Available?
The amount of equity accumulated by the consumer and their selected product define how much money is available to them. Most lenders provide up to 80% of the equity with the loans. On the other hand, lenders provide a maximum of 95% of the equity through the credit line.
Accessing the Funds
When taking out a loan, the consumer gets a lump sum. The lender wont let them get a little here or there with the loan. It is paid in full once the consumer is approved. It is great for consumers who want to get all of it at once, but it doesnt give them any control over the potential balance moving forward. The consumer is responsible for repaying all the loan balance, regardless of their future financial status.
When starting the credit line, the consumer borrows a value up to the credit limit. It gives the consumer more power over how much they are required to pay back. They arent required to borrow or use the full credit limit. The consumer also has the option to pay back the balance at any time and replenish the credit limit.
Fixed and Variable Interest Rates
Consumers choose the loan over the credit line due to the fixed interest rates. This is a great thing for consumers who want to borrow a specific value and keep the monthly payments more consistent. The flip side to this is that while the rate is consistent, the consumer wont get a lower interest rate if it is available.
The credit line has a variable interest rate. This means that the consumer wont get a more consistent interest rate. But it is possible for them to achieve a lower interest rate when it is available. Consumers compare the opportunities according to the best contract features for them.
Paying Back the Draw
When paying back the loan, the consumer has the option of choosing their preferred duration. Their choices range between ten and thirty years. The monthly payments start on the date identified on the contract. For some, the payments start almost immediately.
When paying back the credit line, the consumer has a predetermined draw period that lasts up to ten years. The lenders dont require any payments before the draw period ends. At the end of the draw period, the borrower has up to twenty years to pay off the balance.
How the Consumer Uses the Proceeds
Lenders dont dictate how the borrower uses either product. The consumer has full control over how and when they use the funds. The consumer spends the money on any project they prefer. Common reasons for obtaining either product include college expenses, assisted living, new investments, and even emergency funds.
Some consumers obtain the funds to deposit into savings accounts or certificate of deposit accounts to generate interest. The surplus prevents the consumer from facing financial difficulties in the future and assists them in repaying their loan or credit line back to their lender.