Loan or Line? Decode the Mystery of Home Equity

When you're a homeowner, your house isn't just a place to call home and put down roots—it can also be a powerful financial tool to have in your belt. There are two common ways to leverage the value of your home through Home Equity: Fixed-Rate Loans and Lines of Credit. Though they sound similar, each works differently, and choosing the right option depends on your unique financial situation and needs.

What is Equity?

Equity is the portion of your property that you own, or in other terms, the difference between the current value of your home and the remaining amount you owe on your mortgage. You have home equity when your home's value is higher than what you owe on your mortgage. Your property's equity increases as you make payments toward your mortgage balance and/or as the property value increases.

What is a Home Equity Loan?

A Home Equity Loan allows you to borrow one lump sum of a set amount against the equity of your home. The loan features a fixed rate and a set repayment period that varies, usually up to 15 years.

Pros:

• Predictable monthly payments make it easier to budget.
• Fixed rate means your rate won't go up.
• Typically lower interest rates than personal loans or credit cards.
• Great for: debt consolidation, large one-time expenses for home improvements, medical expenses, and emergencies.

What is a HELOC?

A Home Equity Line of Credit (HELOC) works similarly to a credit card. You are approved to borrow up to a set amount of your equity and have regular access to those funds throughout the "draw period," followed by a repayment period— up to 10 years each. The rate is variable, meaning your rate could change based on the current prime rate.

Pros:

• Flexibility to borrow only what you need.
• Interest accrues on only the amount that you use, not the entire approved amount.
• Typically lower interest rates than personal loans or credit cards.
• Great for: debt consolidation, large ongoing expenses like home renovations, recurring large medical expenses, and tuition costs.

Bringing it Home

Choosing between a Home Equity Loan and a HELOC depends on what you need:

• If you need a large sum for a specific purpose and like stable payments, a Home Equity Loan might be your best bet.
• If you prefer flexibility and want to borrow as needed, a HELOC could be a better fit.

Both Home Equity Loans and HELOCs are excellent ways to use your home's equity, but they serve different needs. Understanding their differences helps you make a smart choice that fits your financial plans. Be sure to talk with our mortgage experts by stopping into your local branch, giving us a call at 616-261-5657 (option 2), or sending an email to MortgageTeam@communitywestcu.org to find the best option for you.