HELOC or Equity Loan – Which one is right for you?

There are really three types of home equity loans: home equity loan, home equity line of credit (HELOC) or cash-out refinance. We’ll break down all three so you can figure out which one makes the most sense for your situation.

Equity Loan HELOC Cash-out Refinance

Who is this good for?

People who want money for a one-time event and prefer the security of fixed-rate loans. This is a good option if you want to keep your existing mortgage and prefer to receive the cash in a lump sum.

Details

This is essentially a second mortgage where the rate is usually fixed and you repay both interest and principal each month. The payment is received as a lump sum and you cannot draw additional money from the loan. The interest rates are generally higher than HELOCs of the same amount because you have the security of a fixed rate. The interest is usually tax deductible for loan amounts up to $100,000.

Who is this good for?

People who need access to a reserve of cash over a period of time. For example, during a remodel you can withdraw cash periodically to pay contractors. HELOCs provide the flexibility of having access to cash, but not paying interest until you actually withdraw it.

Details

Equity lines of credit let you draw cash as you need it up to your credit limit. These are adjustable loans so your monthly payments will change with the market. Often, HELOCs allow you to pay interest only for an initial period which can lower your monthly payments until you are ready to pay principal also. The interest is usually tax deductible for loan amounts up to $100,000.

Who is this good for?

If you’ve built a lot of equity and want to refinance your entire mortgage, this is the way to go. There are many reasons to refinance, such as taking advantage of lower rates or switching from an ARM to a fixed-rate loan. If you plan to refinance and also want extra cash, this takes care of both.

Details

This is a refinance where you’ve build enough equity to refinance for more than you currently owe and take the additional cash. This will increase your monthly payments because you are borrowing more. You should compare the rates for refinancing against those for equity loans to see which are better. The interest on the new mortgage is usually tax deductible.

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