HELOC or home equity loan? Do you know the difference? Both can be powerful financial tools for a homeowner. While some people use the terms interchangeably, they are very different financial offerings carrying their own benefits and risks.
If you’re planning to do some home repairs or remodeling or have a major purchase on the horizon, you’ll want to understand the difference between a HELOC and a home equity loan.
Understanding Home Equity
In order to make a decision on applying for home equity loans in Wyoming it’s important to understand what home equity is.
Most home owners take out a loan to purchase their home. Your home’s equity is the difference between what you owe on that loan and your house’s current appraised market value.
|
Amount owed on your home loan |
Market value of your home |
Potential home equity |
|
$180,000 |
$200,000 |
$20,000 |
There are a number of different factors and calculations a bank will perform to determine how much of that equity could be made available to you as a loan.
What is a HELOC?
HELOC stands for Home Equity Line Of Credit. When you apply to a bank for a HELOC you are asking for a credit line that is based on the available equity in your home.
Say your home has $20,000 in available equity and you want to open a HELOC of $10,000. You would use that to make your purchases and then start to pay it off. As you pay that money back, it becomes available to you again through your HELOC. In this way it functions in much the same way as a credit card.
HELOCs are designed with competitive interest rates that are generally based, in part, on the U.S. Prime Rate.
How Does a Home Equity Loan Work?
Home equity loans are commonly referred to as second mortgages. The "collateral" you are using to take out this loan is the available equity in your house.
A home equity loan is a “classic” style of loan - you borrow it from the bank, use it for what you need, and then make payments to pay the loan off. Unlike a HELOC, as you pay the loan down the funds do not become available again for use.
Home equity loans typically offer competitive interest rates at a fixed percentage.
Can you refinance a home equity loan?
There may be times when it is advantageous to refinance your home equity loan. This may be done to:
- Lower your monthly payments
- Increase your monthly payments in order to shorten the term of the loan
- Move from an adjustable rate to a fixed-rate
- Increase your loan amount
When considering home equity loans in Wyoming, our bankers can help you consider all of these options for refinancing or opening an initial loan.
When Would I Use a Home Equity Loan or HELOC?
Home equity loans are often used for home remodeling or repairs. Even though the loan “originates” in the house it can be used for other things as well such as debt consolidation, major purchases or even something like paying for college. You can work with one of our bankers to determine which loan option is the best for your needs.
Home Equity Line of Credit vs. Loan
While a HELOC and a home equity loan are both based on the equity available in your home there are some differences between how they allot that equity.
|
HELOC |
Home Equity Loan |
|
|
Available amount |
Based on market-determined equity in your home. |
Based on market-determined equity in your home. |
|
Benefits |
Credit line “returns” as you pay the initial balance down. This allows you an opportunity for additional access if needed. Could bring you a potential tax deduction. |
Provides predictable monthly payments that can often be spread over a longer period of time. Could bring you a potential tax deduction. |
|
Rates |
Typically variable |
Generally based on fixed-interest rates. |
|
Risks |
If the value of your home decreased you could have negative equity and end up owing more than the home is worth. If you stopped making payments, you could be foreclosed on. |
If the value of your home decreased you could have negative equity and end up owing more than the home is worth. If you stopped making payments, you could be foreclosed on. |
|
Access |
Draw on the loan as needed. |
Receive the full amount of the loan in one lump sum. |
Choosing Home Equity Loans in Wyoming
When you’re looking at a loan to upgrade your home you are not just making an investment in your property, but in the basic fabric of the community. It’s a big responsibility and a home loan is a big decision. But it doesn’t have to be a complicated one, because we’re here to help.
From our beginning we have been supporting homeowners across the community purchase their homes and then use their equity to build their investment. The experience that we’ve developed has resulted in a loan process that is streamlined and stress-free.
Reach out to your local branch today to see how you can put your home to work for you.
