Things to consider before getting a HELOC
HELOCs could be a great option for homeowners because it allows you to spend money as you need it, but like home equity loans, it’s important to understand the advantages and drawbacks of HELOCs.
Advantages of HELOCs
- Interest may be tax deductible: Like home equity loans, the interest on a HELOC may be tax deductible if the money is used on home renovations that raise the home’s value. Please consult your personal tax advisor.
- Lower interest rates: Using your home as collateral could qualify you for lower interest rates compared to unsecured lines of credit, like credit cards.
- Only borrow what you need: Home equity loans require you to take out a lump sum upfront, but with HELOCs, you have the flexibility to spend what you need, when you need it.
- HELOCs could raise your credit score: There are multiple factors that affect your credit score, including payment history and credit mix. Adding a HELOC to your portfolio diversifies the types of credit you have and making on-time payments demonstrates financial responsibility, which could increase your credit score.
Drawbacks of HELOCs
- You could risk foreclosure: Whether you choose a home equity loan or a HELOC, using your home as collateral is a risk because if you fail to make payments, you could lose your home.
- Adjustable interest rates: Since HELOCs typically have adjustable rates, this can make it difficult to accurately budget because you may not be able to predict your payment month to month. With an adjusted interest rate, your interest rate and payment will increase, or decrease based on market interest rates.
- It could be easy to overspend: HELOCs have a draw period that could be up to 10 years. During this time, you’re only required to make interest-only payments while you have unlimited access to your credit line. If you don’t have a strong budget or plan for these funds, it could cause some borrowers to use more money than they need without considering how that could affect their payment when the draw period ends. That means after the interest-only draw period, the payment during the repayment period could increase significantly to repay principal and interest.
The bottom line: Which equity option is right for me?
Using the equity you’ve worked hard to build to fund home renovations or achieve a personal goal is rewarding, but it’s tough to know which borrowing option is right for you. Home equity loans allow you to receive the loan amount upfront and offer predictable, fixed monthly payments, while HELOCs allow you to spend the money that you need, exactly when you need it. Both are helpful in specific circumstances, and both come with risks and could lead to foreclosure if you default on the loan.
At Huntington, we’re here to help you reach your financial goals. Before choosing between a home equity loan or HELOC, be sure to speak with a lending specialist at (800)480-2265 or come see us at your local Huntington branch. If you’re ready to take that next step, start our HELOC online application or our home equity loan online application today.
Frequently asked questions about HELOCs and home equity loans
Which is better, a HELOC or a home equity loan?
It depends on your situation. A home equity loan is often better if you need a one-time lump sum with a fixed rate and predictable monthly payments, while a HELOC can be a better fit for ongoing or uncertain expenses, offering flexibility to borrow as needed, typically with a variable rate. Both options use your home as collateral, so the right choice depends on how you plan to use the funds and how much flexibility you need.
How is a $50,000 home equity loan different from a $50,000 HELOC?
A $50,000 home equity loan gives you the full $50,000 at closing and charges interest on the entire amount from day one, while a $50,000 HELOC allows you to draw up to $50,000 as needed and only pay interest on what you use. With a home equity loan, you’ll have fixed payments based on the full balance, which can be helpful for predictable budgeting. A HELOC, on the other hand, offers flexibility for ongoing expenses, but your balance and payments can change over time depending on how much you borrow.
What is the downside of a HELOC?
A HELOC uses your home as collateral, so missing payments could put your home at risk of foreclosure. Interest rates are usually variable, which means your rate and monthly payment can increase over time. In addition, payments may rise after the draw period ends, when you begin repaying both principal and interest instead of interest only.
How do I choose between a HELOC and a home equity loan?
As a rule of thumb, choose a home equity loan for a known one-time expense and a HELOC for ongoing or uncertain costs. A home equity loan provides a lump sum with fixed payments, making it easier to budget. A HELOC offers flexibility to borrow as needed over time, which can be helpful if your costs may change or occur in stages.
