Investing in a home is a long-term decision as it provides shelter and protects us from the tough weather conditions. The value of the home increases with the lapse of time. Also if one has taken a mortgage, their equity in the home increases with the payment towards the loan they make. With every payment the outstanding principal of the loan decreases and this increases the equity of the homeowner in the property.
Interest rates follow a cyclical pattern and there are times when the interest rates increase while at the other times they see a trend reversal and go down. The timing of the mortgage loan becomes very important. One needs to understand that if they take the loan when the interest rates are low they are going to get the best deals on the loans.
So if a borrower envisages that they have substantial equity on their home and the interest rates are lower than what their current mortgage is at, they think of taking a home equity loan to readjust their interest rates at a much favorable level. This might result in good savings as well as the amount they receive from the home equity can be used for the repayment of different debts.
One needs to decide the reason for which they require the home equity loan and the amount which they will require to achieve their goals. If they are looking to take the unsecured loans for a specific purpose like the home renovation or the debt consolidation then one can go for the home equity loan or the HEL where they get the loan amount in a lump sum. However, in case the borrower requires the money to meet their ongoing need for money in the case of medical emergency or funding the education of the child, they should look for the Home equity line of credit or the HELOC.
The major point of difference between the HELOC and the HEL lies in the fact that that the HELOC serves as a revolving credit with an upper limit much similar to the credit card where one can use the available limit as and when required. Similarly the borrower under the HELOC can the money from the lender as and when required up to the threshold set for them. The borrower has to pay a minimum monthly repayment towards the loan taken and hence they must use the money judiciously.
A HEL or the Home equity loan offers the money as a lump sum to the borrower which they can use for the different purposes they require. There are several factors which determine the amount of the loan other than the home equity. These are the credit history and rating of the borrower and the overall financial standing which includes the nature of the job, expense, and the lifestyle of the borrower.
Interest rates offered on the HEL and the HELOC are lower as compared to those on the credit cards and other similar loans. These are generally loans for bad credit and the borrower can benefit from the interest payment as it is tax deductible which means that the same will be deducted from the taxable income of the borrowers making it a profitable proposition.
One must bear in mind that both the HELOC and the HEL take the home as the collateral. One must take these loans for an important cause only and should do a proper groundwork to ensure that they can repay the loan amount back to the lender since a lapse in the same means that the borrower loses their house.