Over 46% of mortgaged homes in the US are considered equity-rich. This implies that the outstanding loan balance is less than half the home’s value. You can also tap into your home’s equity with a HELOC, or home equity loan. 7% of Americans hold debt in the form of home equity loans or lines of credit.
Moreover, ⅔ of homeowners have applied for a home equity loan for home renovations. Besides this, a typical homeowner has around $199,000 of tappable equity. This means more homeowners can apply for a HELOC or a home equity loan to fund renovations or buy a new house.
HELOC and home equity loans offer lower interest rates than most other loans. Additionally, 57% of homeowners are expected to apply for a home equity loan or a HELOC in the future. You can also apply for these loans and search for lenders online with Houzeo.
HELOC vs. Home Equity Loan: What Are They?
HELOC and a home equity loan may sound similar based on their functionality but differ significantly in reality. They both let you borrow based on the equity in your home.
Home Equity Line Of Credit (HELOC)
A HELOC lets you borrow money from your home’s value, like a credit card with a limit. You can repay and borrow again as needed. But unlike a credit card, missing payments could mean losing your home.
Apart from this, HELOC interest rates can be fixed or change over time. With changing rates, your minimum payment might also go up or down.
Home Equity Loan
A home equity loan is like a second mortgage that lets you borrow money based on your home’s value. You get a lump sum upfront and must repay it in fixed monthly payments over a set term. However, if you don’t repay, you may lose your home.
You can estimate your home equity with Houzeo’s most accurate home value estimator. This is free and online, giving you an estimated home market value.
HELOC Requirements vs. Home Equity Loan Requirements
While both HELOCs and home equity loans leverage your home’s equity, their qualification requirements can differ slightly. Let’s delve into the specifics needed to secure each loan option.
- Credit Score: Both loans normally require a credit score in the upper 600s (about 680). However, some lenders may offer lower HELOC rates to borrowers with excellent credit ratings.
- The debt-to-income ratio (DTI): compares your monthly debt commitments to your gross income. Generally, lenders desire a DTI of less than 43%. However, because of the draw period structure, some lenders may be more liberal with DTI for HELOCs.
- The loan-to-value ratio (LTV): measures the amount you wish to borrow to the appraised worth of your home. For both loans, the maximum LTV is roughly 80%, which means you must have at least 20% equity in your house. Some lenders might allow for a slightly greater LTV on HELOCs (up to 85%).
Remember that requirements differ amongst lenders, so look around and evaluate rates and terms.
How to Obtain a Home Equity Loan or Line of Credit
To be eligible for a HELOC or HEL, you must fulfill a certain set of criteria, including:
- Evaluate Your Equity: You need to know how much equity you have in your house before applying for a HELOC or HEL. To find this out, simply subtract your current mortgage balance from the market value of your home.
- Check Your Credit Score: For HELOCs and HELs, most lenders choose homeowners with credit scores of 620 or higher and around 680.
- Research Lenders: Get quotes from different lenders (banks, credit unions, online lenders, brokers). Also, compare their interest rates, fees, and repayment terms to find the best deal for your HELOC or HEL.
- Gather Documentation: Prepare the required documentation to speed up the application process. This includes your tax returns, property appraisals, employment verification, evidence of income, and homeowners insurance.
- Apply for Pre-Approval: Getting a pre-approval for a HELOC or HEL can give you an idea of how much you can borrow.
- Submit Your Application: After you choose a lender, submit your application for a line of credit or home equity loan. After reviewing your application, the lender might need more information or clarification.
- Review and Accept Loan Terms: Once approved, thoroughly check the HELOC/HEL details. Look for interest rates, repayment terms, and any fees. If everything looks good, go for it.
- Complete the Closing Process: Sign the relevant documents and take any last actions the lender requires to complete the loan.
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Pros and Cons of HELOCs vs. Home Equity Loans
The basic distinction between the 2 loan types is that home equity loan offers fixed payments and lump sum, whereas HELOC offers flexibility and variable interest.
Pros and Cons of HELOCs
| Pros | Cons |
| Make interest-only payments throughout the draw period. | HELOCs have a time limit and need to be renewed or closed eventually. |
| Pay interest only on the money you borrowed from a line. | Interest rates on HELOCs are adjustable and can change based on the prime rate. |
| Borrow the same amount of cash again after paying down the balance. | Inconsistent payments on HELOCs can lead to a longer payoff time. |
| Withdraw money from your account for up to ten years. |
Pros and Cons of Home Equity Loans
| Pros | Cons |
| Home equity loans offer fixed interest rates throughout the loan term. | Home equity loans offer less flexibility – you get a lump sum upfront and repayments are fixed. |
| You’ll make the same monthly payment for the entire loan duration. | Unlike HELOCs, you can’t borrow more once the loan amount is used. |
| This predictable payment structure ensures the loan is paid off by the end of the term. | You start paying interest on the full loan amount right away. |
| Home equity loans typically have repayment terms of up to 30 years. | Home equity loans can’t be extended or renewed after the term ends. |
Bottom Line: Which One Is Right for You?
A home equity line of credit (HELOC) and home equity loan should be chosen after carefully weighing your financial goals. If you value flexibility above all else, a HELOC is the best option. It allows you to take out loans for different costs at different times and as needed over the draw term.
On the other hand, if you have a specific, one-time expense in mind, consider a home equity loan. To choose the best alternative, consider your comfort level with borrowing, your long-term goals, and your financial condition.
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Frequently Asked Questions
Are rates lower on a HELOC or home equity loan?
Rates on a HELOC and a home equity loan vary based on the borrower’s financial profile, market conditions, and lender policies. Generally, HELOCs tend to have lower initial interest rates than HELs.
What credit score is required for a HELOC?
Credit score requirements for a HELOC vary among lenders but generally range from around 620 to 680 or higher.
What credit score is required for a home equity loan?
Similar to a HELOC, credit score requirements for a home equity loan usually range from around 620 to 680 or higher, depending on the lender.
Is a HELOC riskier than a mortgage?
HELOCs are riskier than mortgages. Their interest rates can change, making your monthly payments unpredictable and potentially more expensive.
