Comparing Home Equity Products
When facing a significant expense that exceeds your current budget or savings—such as debt consolidation, medical bills, a wedding or college tuition—finding the right lending solution is important. A Home Equity Loan or a Home Equity Line-of-Credit (HELOC) is a popular option, leveraging the equity in your home to provide flexible spending power. Equity is the amount of your home you own and is calculated based on the current market value of your home minus any outstanding mortgage amounts. A home with a $250,000 appraisal value and a $175,000 mortgage balance would provide $75,000 in equity that you can borrow against. Let’s explore how home equity loan solutions compare to other borrowing options.
HELOC vs. Home Equity Loan
While both HELOCs and closed-end home equity loans use your home's equity as collateral, they serve different financial needs.
- Access to Funds: HELOCs offer a revolving line of credit, allowing you to borrow funds as needed. Closed-end home equity loans provide a lump sum upfront.
- Repayment: HELOCs require you to pay only on the amount borrowed during the draw period on funds you draw, while closed-end loans have fixed monthly payments comprised of principal and interest.
- Flexibility: HELOCs are more flexible for managing ongoing expenses, while closed-end loans are better suited for one-time large purchases.
HELOC vs. Personal Loan
Comparing a HELOC to a personal loan reveals several key differences:
- Interest Rates: HELOCs typically have lower interest rates because they are secured by your home, unlike unsecured personal loans. In 2024, the average HELOC interest rate is 8.7%, while rates on personal loans are closer to 12.5%.
- Tax Benefits: Interest paid on a HELOC can be tax-deductible if used for home improvements, a benefit not available with personal loans. Be sure to consult your tax advisor to learn more.
- Loan Structure: Personal loans provide funds as a lump sum with a fixed repayment schedule, while HELOCs offer a flexible line of credit with variable rates, which can be more adaptable to your financial situation.
HELOC vs. Credit Card
When weighing a HELOC against using a credit card, consider the following:
- Interest Rates: A HELOC generally offers much lower interest rates. According to Bankrate, the average credit card interest rate in 2024 was 22.6%, compared to 8.7% for HELOCs.
- Credit Limits: HELOCs can provide a larger line of credit based on your home’s equity, exceeding typical credit card limits.
- Long-term Cost: With potentially tax-deductible interest and lower rates, a HELOC can be a more cost-effective solution for large expenses compared to credit cards.
HELOC vs. Cash-Out Refinance
While both a HELOC and a cash-out mortgage refinance provide access to your home’s equity, the latter involves replacing your existing mortgage with a new one at a higher amount and taking the difference in cash.
- Access to Funds: HELOCs offer a revolving line of credit, while cash-out refinancing provides a lump sum upfront.
- Closing Costs: Cash-out refinancing typically involves higher closing costs.
- Long-term Cost: Cash-out refinancing can lead to higher long-term interest payments due to the extended mortgage term.
- Flexibility: HELOCs offer more flexibility in accessing and repaying funds while a cash out refinance repayment includes monthly principal and interest payments.
KEMBA Offers Home Equity Products
KEMBA Financial Credit Union offers competitive rates on both HELOCs and closed-end home equity loans that can help you manage significant expenses without depleting your savings. With the recent federal rate changes, borrowing costs are lower, making it an ideal time to consider a HELOC home equity product over other borrowing products.
For more detailed advice on using a home equity product for large expenses, we encourage you to visit a local KEMBA branch or call us at 614.235.2395 and select Option 4 to get started. At KEMBA, we provide access to the funds you need to improve your personal finances.