HELOC Vs. Home Equity Loan: Pros, Cons And Alternatives (2024)

FAQs

Is there a better option than a HELOC? ›

Alternatives to a HELOC

If you know exactly how much you need upfront, and plan to spend it promptly, a home equity loan could be a better option than a HELOC. Cash-out refinance: A cash-out refinance replaces your existing mortgage with a new loan that has a bigger balance.

The cons are that HELOCs use your home as collateral, they can make it easy to overspend, and they have variable rates that can rise.

Assuming a borrower who has spent up to their HELOC credit limit, the monthly payment on a $50,000 HELOC at today's rates would be about $403 for an interest-only payment, or $472 for a principle-and-interest payment.

While a HELOC works like a credit card — giving you a maximum amount you can borrow with a variable interest rate — a home equity loan works more like your mortgage. You get a lump sum of money, and you repay it on a set schedule with a fixed interest rate.

Consolidate debt

Consider incorporating a lower-rate home equity loan or HELOC into your financial planning to help consolidate your higher-rate debt. Start by comparing the interest rate offered between a home equity line of credit and your existing debt, such as credit cards or auto loans.

If you don't have a solid estimate—or you need access to money over an extended period (for college tuition or a home renovation, for instance)—a Heloc may be the better option, as it will allow you to withdraw money as needed, up to your credit limit.

Experts advise against using loan money to buy stocks—you can possibly lose the money and be stuck with a loan you can't afford to repay. You should also avoid using a HELOC to invest in luxuries like vacations, since the money will be gone quickly without an asset to sell if you end up needing the money down the road.

Watch out for balloon payments: If you don't manage your HELOC monthly payments properly, you could be hit with a large “balloon payment” at the end of your repayment period. This large payment can trap you in a cycle of debt if you can't pay it off or, worse, could result in losing your home.

HELOCs can be dangerous if you don't manage them carefully. Because they usually come with variable interest rates, your monthly payments can fluctuate. And those payments will jump dramatically if you only repay interest during the initial draw period, leaving the entire debt to handle during the repayment period.

How much a month is a 100000 home equity loan? ›

If you took out a 10-year, $100,000 home equity loan at a rate of 8.75%, you could expect to pay just over $1,253 per month for the next decade. Most home equity loans come with fixed rates, so your rate and payment would remain steady for the entire term of your loan.

A $10,000 Home Equity Loan at 8.49% would equal an APR of 8.49% with 120 monthly payments of $123.94. 10 Year- 7.99% Annual Percentage Rate (APR) shown is subject to change at any time and without notice. All loan applications are subject to individual approval.

Yes, typically an appraisal is required in order to obtain a HELOC, however it is often a less detailed appraisal than necessary for a primary mortgage. To assess the amount of loan a homeowner can be awarded, lenders will need an accurate account of the value and condition of the property.

These rules changed when the Tax Cuts and Jobs Act of 2017 was enacted. Since then, HELOC interest is only deductible when its funds are used to buy or significantly improve your primary residence or second home.

"The HELOC may be good for short term or temporary loans as they are easier to secure," says Supplee. But keep in mind that "the HELOC is variable and current interest rates are nowhere near stable." So, if you plan to pay back the money over the long-term, you may want to opt for a home equity loan.

Monthly payments: Borrowing against your HELOC means cutting into your monthly cash flow and increasing your debt-to-income (DTI) ratio because you'll need to make monthly payments. An HEA, in contrast, requires no monthly payments and thus has no impact on your DTI ratio.

A home equity loan offers borrowers a lump sum with an interest rate that is fixed, but tends to be higher. HELOCs, on the other hand, offer access to cash on an as-needed basis, but often come with an interest rate that can fluctuate.

In the past few years, rates on new HELOC have been on the rise, thanks largely to the Federal Reserve. In an attempt to quell inflation, the central bank has increased its benchmark federal funds rate over the past two years. This rate serves as the basis for the prime rate—the index most HELOC rates hinge on.