Your Home as a Source of Cash

As seen on The Rhode Show

Understanding the Differences Between Home Equity Loans and Home Equity Lines of Credit

Outside of being an investment, your home can also be a source of cash. As a homeowner, you've likely heard the terms “home equity loan” and “home equity line of credit. " Both are options for accessing the value of your home, each with a few similarities as well as a few drastic differences. So which is the better option?

There is no one answer. Determining which option works best for you depends on your specific needs and goals. Here are some tips on differentiating and choosing between a home equity loan and home equity line of credit.

Asking the Right Questions; Assessing Your Needs and Goals

How much cash are you looking to take out of your home and how quickly will you be paying it back? What are the current terms of your mortgage, rate & remaining term? It is important to understand the difference between a home equity line of credit (aka HELOC) and a home equity loan, and these questions will help you determine what program / product is best for you.

Home Equity Loan

Home equity loans are fixed rate term loans in which the borrower gets a one-time lump sum. Home equity loans are paid back over a specified term (5, 10, 15, 20 or 30 years) and do not have a draw period as the home equity line of credit does.

Home Equity Line of Credit*

Home equity lines provide the option to use the equity in your home for home renovations or major expenses that need to be paid sooner rather than later, much like you would use a credit card. A line of credit is also a great option for borrowers who are looking to have access to funds in case of an emergency. HELOC’s are revolving accounts with a variable rate (based on the Prime rate) and draw period, which you pay based on the amount borrowed. As you pay down the principal, the credit then becomes available to you, but attached to your home. Payments during the draw period are typically interest only and you pay to the principal as you wish, with principal and interest payments during the repayment period.

Which is the Better Option for You?

• If you have a great rate on your mortgage and are only looking to borrow a small amount; a home equity line of credit would be your best option.
• If you are looking to borrow a large sum of money and have no plans on paying it back quickly; then you would want to look at refinancing or a home equity loan.
  • This option, however, should be dependent upon the current rate of your mortgage vs. the proposed rate of the home equity.
• If you are looking to borrow funds and know you will be paying them back in the near future or have the means to pay it back if the Prime rate increases to a point you are uncomfortable with; then the home equity line of credit is the way to go.

At Washington Trust we offer free mortgage check-ups and are happy to review these options with you and run numbers to determine which program and product will best fit your needs.