Using your home equity can be a great option if you've got a project that needs funding. Two possibilities include a home equity line of credit (HELOC) and a home equity loan (HELOAN). Read on to learn the pros and cons so you can make the right choice for your finances.
What is Home Equity
Home equity is the part of your home's value you own outright. It's the difference between the total amount your home is worth and what you owe on your home (your mortgage). It can be a valuable tool to help you build wealth over time as your home increases in value. The equity in your home can be used for just about anything, from home improvements or debt consolidation to education expenses and beyond. Whatever you plan to use it for, it's always a good idea to consult a financial advisor and think through your current and future financial situation and goals.
HELOC Pros and Cons
Advantages of a HELOC include:
- Payments during the draw period are interest-only
- Only pay interest on the money you actually draw out and use
- Choose how much or how little to borrow; no need to know exactly how much you need to borrow when you apply
- Borrow and pay back again and again during the draw period
- Lower interest rates than other forms of lending, like credit cards or personal loans
- Flexibility to draw funds when needed
- Interest is potentially tax deductible (check with your tax professional)
Disadvantages include:
- A HELOC is open for a limited time (at WaFd, there is a 10-year draw period and 15-year repayment period); after that's up, you'll need to reapply and open a new HELOC
- Variable interest rate, which means the interest rate will adjust during the draw period and could increase or decrease
- Because payments are interest only during the draw period, they can take a long time to pay off if you don't make principal payments during that time
- Possibility of overspending since you can borrow whenever needed if there are funds available (like a credit card)
- Since your home is collateral for the loan, there is a risk that you could lose your home if you can't pay back the loan
HELOAN Pros and Cons
Advantages of a HELOAN include:
- All funds are deposited to your account at once for your use
- The interest rate is fixed for the life of the loan
- Enjoy the same predictable payment every month
- Set payments mean your loan will be paid on a set repayment schedule with a firm end date
- At WaFd Bank, you can choose your repayment period (5, 10, 15, or 20 years)
- The loan does not need to be renewed or extended
Disadvantages include:
- Start paying interest on the total loan amount as soon as the loan is closed
- Cannot reborrow as you pay down the balance
- The loan cannot be renewed or extended, but you can reapply for a new HELOAN if needed
- Since your home is collateral for the loan, there is a risk that you could lose your home if you can't pay back the loan
| Detail | HELOAN | HELOC |
|---|---|---|
| Uses your home's equity as collateral | Yes | Yes |
| Has closing costs | Yes | Yes |
| Potential tax deductions available | Yes (check with a tax advisor) | Yes (check with a tax advisor) |
| How you can use it | For just about anything | For just about anything |
| Interest rate type | Fixed | Variable |
| Monthly Payment | Set | Changes, payments are interest only during the draw period |
| Amount borrowed | Receive a lump sum for the total amount you applied for | Access to a line of credit for the total amount you applied for (only pay back what you actually borrow) |
| Loan changes | None | After the draw period, your HELOC will change to an amortized loan with principal and interest, called the repayment period (15 years at WaFd Bank) |
When is a HELOC a Better Option
A HELOC can be a better option if you have a general idea of how much you need to borrow or if you want to be able to borrow when you need it. This might be the case if you're remodeling your home and are tackling one project at a time. It can also help you cover unexpected costs that may come up over time. A HELOC also gives you the flexibility to borrow and pay back as time goes by (during the draw period). Payments are also interest only during the draw period, so it can be an affordable option.
When is a HELOAN a Better Option
If you have fixed costs and prefer the reliability of a set payment every month, a HELOAN may be better for you. Because you receive all the money you borrow at once, it can be better for larger expenses such as buying a car or updating the kitchen. With a HELOAN, you can't spend more than you already borrowed, so you know exactly how much you need to repay. If you would prefer not to have the option to borrow more, a HELOAN might be for you.
WaFd Bank is Here to Help
No question is too small for our friendly bankers! With WaFd Bank you also have access to tools and services to help you manage your finances and get the most from your money. Our knowledgeable loan officers are here to answer all your questions and help you find the solutions that best fit your needs. Visit us at your neighborhood branch, give us a call at 800-324-9375, or check out the home loan options WaFd Bank has to offer.
*Nonsufficient funds fees may apply
All loans subject to credit approval
