Home Loan vs. HELOC
Both a home loan and a home equity line of credit, known as a HELOC, are secure loans. The value of your home backs these loans. If you default on the loan, your lender could foreclose on your home. Therefore, it is essential to weigh the benefits of borrowing against your home for any needs. Still, when compared with unsecured loans, both home loans and HELOCs are less expensive because of the reduced interest rate.
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Equity
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A homeowner traditionally uses a home loan to purchase a home. If you already own your home free and clear, you may be able to obtain a home loan to borrow a substantial amount of money against the home. In either case, the amount borrowed may not be more than the value of the home at its current appraised value. With a home equity line of credit, the amount borrowed may not exceed the home's value minus any mortgages or tax liens on the property. This is equity, the non-mortgaged value of the home.
Borrowing Method
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A significant difference between a home loan and a HELOC is the method of borrowing funds. With a home loan, a lump-sum payment is used to purchase the home. This onetime payment establishes the loan. With a HELOC, the homeowner may borrow from the loan as needed over time. A HELOC works like a credit card. The borrower uses the funds when needed and then repays the balance over a period. The homeowner can continue to borrow and repay as long as the loan is open and has an available credit limit.
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Interest Rates
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Interest rates for a home loan or a HELOC are relatively low when compared with unsecured loans such as credit cards. Home loan interest rates may be lower than HELOC rates. Both of these types of loans may have fixed rates or adjustable rates, though it is more common for a home loan to have a fixed rate than it is for an HELOC to have one. A fixed rate simply means the interest rate will not fluctuate over the lifetime of the loan. With an adjustable rate loan, the rates may fluctuate up or down depending on the fluctuations in the financial markets.
Loan Size
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Typically, a home loan will be a larger loan than a HELOC. A home loan may be as large as the total value of the home, based on the appraisal of the property. Most HELOC loans are no larger than the equity available in the home. The amount you can borrow in either situation is also dependent on your credit rating, debt-to-income ratio and employment/income qualifications. These qualifications differ from one lender to the next.
Uses
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In most situations, a borrower uses a home loan to purchase a home. With a HELOC, the borrower may use the funds for home improvements, for day-to-day expenses, to consolidate debt or any for other needs.
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