In this article, we ll cover the benefits and disadvantages of home equity loans, home equity lines of credit (HELOCs) and personal loans. Whether you re looking for funds to finance a major expense or simply pay down consumer debt, this article can help you decide what type of financing is best for you.
Home Equity Loan
* Best for: Major, unexpected expenses or large investments.
* Not for: Ongoing or smaller expenses.
How it works: A home equity loan is like a mortgage the borrower is given a lump sum of money up front and begins paying interest and principal payments right away to work off the debt. The amount of the loan extended to the borrower is based on how much equity has increased in the home after appreciation and mortgage payments.
* Pro: Home equity loans typically offer a lower, fixed interest rate than HELOCs and personal loans. This benefits the borrower over the term of the loan as well as in the short term.
* Con: Borrowers have to pay interest on the full balance right away.
Home Equity Line of Credit (HELOC)
* Best for: Ongoing expenses like major renovations, college tuition or having a baby.
* Not for: Single, major expenses.
How it works: A home equity line of credit is secured by the equity in your home, and you can draw on it as you would using a credit card or savings account. Typically, the rate is adjustable meaning it can be changed periodically depending on financial market trends and you ll make interest payments on what you borrow until the term of the line of credit is over.
* Pro: You only pay for what you borrow, and these loans are often easier to qualify for and faster to obtain than home equity loans.
* Con: The interest rate is adjustable and often higher than a home equity loan. When shopping for a home equity line of credit, look for a low permanent rate.
Personal Loan
* Best for: Small single expenses like a new car or small business investment.
* Not for: Ongoing living costs, major projects like home renovations.
How it works: A personal loan is a one that is offered by the lending institution and is often secured by the piece of equipment (e.g. a car) or property (e.g. business) that you re using the loan to purchase. Typically, personal loans are smaller and can often be obtained in the form of a line of credit.
* Pro: Simple application process without sacrificing home equity or risking the home itself.
* Con: Without the security of home equity, the interest rates on a personal loan are often higher, so it is advantageous to pay off the loan as quickly as possible.
In short, whether you obtain a home equity loan, a HELOC or a personal loan will depend on why you need to borrow the funds, the kind of interest rates you can afford and your own current financial situation.
Remember, always shop around for the lowest interest rate! Doing so can save you hundreds if not thousands of dollars over the life of the loan.
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