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The Differences Between HELOC & Mortgage Loan

Refinancing: HELOC VS. Mortgage Loan, Pros and Cons

With higher property values, one of the biggest perks of owning a home is the ability to tap into your home’s equity for a variety of other financial needs.

Whether it is for debt repayment, the purchase of other assets, home renovations, a wedding, or some other large, unexpected expense, a Mortgage Loan or Home Equity Line of Credit (HELOC) can help you secure funds against the equity value of your home. Besides the immediate cash flow, you enjoy lower interest rates than what you may pay for most other types of personal loans.

Both, HELOCs and Mortgage Loans unlock the equity value of your home. Understanding the ins and outs of both products will help you choose the one that best meets your financial requirements and goals.

The Facts and Features of HELOC and Mortgage Loan

While many homeowners tend to use the terms HELOC and Mortgage Loan interchangeably, the two are quite different from each other.

Mortgage Loan

A loan secured by your home as collateral helps you borrow lump-sum cash against the equity value of your home. This is at a fixed interest rate, with a repayment period that can range up to 30 years (terms 1-10 years). There are some institutions that will insist on ‘blended rates’ when refinancing and there are some institutions that are able to segregate several portions so that you can have several loans with different rates and amortizations (usually within the same institution).

Some of the advantages of a mortgage loan are:

  • Lower interest rates than the HELOC, personal loans or credit cards.
  • Disbursed as a lump sum deposit.
  • The payment terms are fixed and predictable, which means you can plan your finances with a fair bit of certainty.

On the flip side,

  • Depending on the mortgage product; the mortgage loan can have a lack of flexibility in the sense that it is a one-time lump sum amount disbursed and there may be penalties if it is repaid in full before the end of the agreed term.
  • You pay interest the moment the money is deposited into your account regardless of the amount needed at different stages of your project.
  • There is very little flexibility after the loan has been finalized.

HELOC (Home Equity Line of Credit)

This type of loan involves a revolving line of credit, secured by your home. In the simplest terms, it works like a credit card. You can withdraw the amount of cash you need (up to a maximum approved limit), pay the balance to zero, and reuse the line of credit. The principal is repayable in full or any amount at your discretion as long as the interest payments are paid every month. You have the minimal obligation of paying the interest accrued every month.

Here are some of the pros of a HELOC:

  • You can tap into your home’s equity when needed and pay off balances at your discretion.
  • The interest rates are lower than credit cards or personal loans.
  • You have the option to make interest-only payments.
  • You are paying interest only on the amount you borrow, and not on the total equity approved in your line of credit.

The disadvantages of a HELOC are:

  • Variable interest rates that may drive up the monthly payments.
  • HELOCs usually have a higher rate than a mortgage loan.
  • Without a disciplined approach, you may risk utilizing all the available equity, and overspend. This can lead to a burden of a large principal amount and interest repayments.

Choose a Trusted Mortgage Specialist to Access the Equity in Your Home

Both HELOCS and Mortgage loans allow you to tap into approximately 80% of your home’s equity value, while giving the lender title to your property. In addition to a calculation of your home equity value, the qualification criteria for both options include an assessment of your income, expenses, assets, liabilities, and credit score.

Remember, your home is a collateral for securing such loans. Hence, while choosing between a HELOC and a Mortgage loan, your goal should be to minimize long-term risks and ensure smooth repayment terms.

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