Home equity lines of credit (HELOCs) and home equity loans are similar in that they both offer ways to turn your home equity into cash. But these two financial tools are not the same.
In this article, you will get answers to your most pressing HELOC-vs-home-equity-loan questions, including:
• What is home equity, and how do I access the cash value?
• Why would someone borrow against their equity, and is it a good idea?
• What is the difference between a home equity loan and a line of credit?
• How can I decide between a HELOC vs. a home equity loan?
What Is Home Equity and How Is It Used?
Home equity is the current market value of your home minus any balances on loans against the home. This is the share of the home’s value that you own, as opposed to the share of the value financed by your lender.
As a homeowner, you can access a portion of this equity by borrowing against it through either a HELOC or a home equity loan.
Common Reasons to Borrow Against Your Equity
Before we discuss the differences between a home equity loan vs. a line of credit, here is a list of reasons why homeowners may choose to borrow against their home equity:
• To cover an unexpected expense (like car repairs or emergency medical bills, for example).
• To finance home renovations or repairs.
• To free up capital for the down payment on an investment property.
• To consolidate existing debts.
• To pay for college.
It’s important to remember that your house is used as collateral when you borrow against your home equity. This means that failure to repay the loan could potentially lead to a foreclosure by your lender. So, you should carefully weigh your need for the cash and your ability to repay the loan before deciding to borrow against your equity.
Two Ways to Utilize Your Equity: The HELOC and the Home Equity Loan
HELOCs and home equity loans both allow you to borrow against your home equity. But they work differently.
What Is the Difference Between a HELOC and a Home Equity Loan?
The primary difference between a home equity loan and a line of credit is how loan proceeds are accessed. With a home equity loan, you receive the amount borrow (minus any fees and costs) in a single lump sum with a clear repayment schedule. But with a HELOC, you are granted a line of credit that you can access as needed. Similar to using a credit card, qualified borrowers are approved for a maximum credit limit and can draw up to the limit. Borrowers repay the amount drawn on a monthly basis, as outlined by the terms of their HELOC contract. Monthly payments will vary based on the outstanding principal balance and the applicable Annual Percentage Rate (APR).
What Are the Advantages and Disadvantages of a HELOC?
There are several pros and cons of using your home equity for a line of credit.
Advantages of a HELOC:
• You can borrow small increments as needed. This flexible system can help you borrow only what you need and keep monthly payments manageable.
• HELOCs typically come with lower interest rates and higher loan limits than credit cards.
• You may be able to get an interest-only HELOC. With an IO HELOC, only interest is due during the “draw period” (the designated time that you can access your equity).
• You may not need to start repaying the balance until the draw period closes and a repayment period begins. This can mean low monthly payments during the draw period, but it also means higher payments during the repayment period.
• Making on-time payments can boost your credit score over time.
Potential downsides of a HELOC:
• HELOCs typically have variable interest rates. If market rates rise, your monthly payment can increase.
• HELOC interest is no longer automatically tax-deductible as it was before 2017. Tax laws currently allow you to deduct only the portion of the loan that is used to finance home improvements.
• Failure to repay a HELOC can potentially result in foreclosure of the home.
• There may be fees for opening and/or maintaining the line of credit.
What Are the Advantages and Disadvantages of a Home Equity Loan?
Pros of a home equity loan:
• Home equity loans typically come with a fixed interest rate, which allows for a predictable monthly payment.
• You get a lump sum that you can spend or invest as you see fit.
• There are no ongoing account maintenance charges or annual fees.
Potential disadvantages of a home equity loan:
• Borrowing too much could lead to unnecessary interest expenses and borrowing too little could require applying for another loan.
• Failure to repay the loan can potentially result in foreclosure of the home.
• There may be fees for originating the loan.
How to Decide Which Is Best for You
HELOCs may be a good option for homeowners who:
• Are unsure how much money they will need to borrow.
• Don’t need cash now but want an open line of credit for emergencies.
• Are willing and able to budget for variable interest rates and changing balances.
Home equity loans may be a good option for homeowners who:
• Know exactly how much money they need.
• Do not want to tempt themselves with an open line of credit.
• Prefer the stability of fixed rates and a scheduled repayment plan.
What You'll Need to Apply
Applying for a HELOC or home equity loan involves completing an application form, providing financial information and authorizing an inquiry into your credit history. Your lender wants to make sure that you are financially able to take on additional debt. Lenders also check to see if you have enough equity in the home to borrow against; most lenders require that homeowners retain at least 15-20% equity in their homes.
To apply for a loan against your home equity, you may need the following:
• The loan application (you can apply online quickly and easily with PNC Bank)
• Government-issued proof of identification (a driver’s license, state ID or passport)
• Proof of income (pay stubs, W2s and/or income tax returns, as applicable, plus proof of any retirement or supplemental income)
• Financial information about your property expenses (mortgage statements, insurance statements and property tax bills, as applicable)
Use Your Home Equity to Access Cash When You Need It
Building equity is one of the greatest perks of homeownership. If you’re ready to convert some of your equity into cash (or you just want to have an open line of credit for emergencies), you can apply for a HELOC online with PNC bank today.
The property securing the CHELOC must be located in a state where PNC offers home equity products. PNC does not offer the CHELOC product in Alaska, Hawaii, Louisiana, Mississippi, Nevada and South Dakota.