What Loan Type is Right for You?
You’ve been making monthly payments regularly for a couple of years or more, and now you’re ready to start thinking about how to make your home’s built-in equity start working for you. There are two loan types available: a home equity loan or a home equity line of credit (HELOC). Here, we’ll guide you through how to use our loan versus line of credit calculator to determine which loan type is right for you.
How Does a Home Equity Loan Compare to a HELOC Loan?
Both of these loan types utilize your home’s built-in equity, but they differ in rates and terms. Both loan types can be leveraged to better position yourself financially when planning for big-ticket expenses like college tuition, student loans, medical bills, investment capital, or home renovations. Both loan types use your home as collateral. Regardless of the loan you choose, it is imperative to budget for a loan that fits within your financial bandwidth; defaulting on your loan could leave you vulnerable to foreclosure.
A home equity loan comes in the form of a one-time, up-front, lump-sum payment that you will repay at a constant rate over a negotiated term. HELOC loans are revolving loans that you can leverage during a negotiated draw period. They come with a variable interest rate that is periodically reset by your lender and fluctuates in alignment with market conditions. During the draw period, you are only required to pay down the interest on your HELOC. Once the draw period ends, you will enter into the repayment period and pay down the principal, interest, and other fees rolled into your loan.
How Do I Use a Home Equity Loan vs. HELOC Calculator?
This loan versus line of credit calculator provides you with an estimate of what your payoff schedule could look like with a home equity loan or a HELOC. Fill in the entry fields below with the most accurate information to get a better idea of what your scheduled payments will look like. Once you’ve completed each input, click the button to see how your monthly payments will be affected according to each loan type.
- Appraised Property Value. You will need an appraisal of your home’s property value to determine how much equity you have built into your home.
- Mortgage Value. This amount should be smaller than your property’s appraised value. Enter the total amount on your loan when you purchased your home here.
- Amount You Wish to Borrow. Enter how much you plan on borrowing using your equity loan.
Then you will fill in the following inputs for the home equity loan portion of the calculator:
- Loan Rate. This is the negotiated interest rate you will pay constantly over the life of your loan.
- Payoff Period. This is the term over which you will pay back your loan. More aggressive monthly payments mean you will save money otherwise spent on interest for the life of your loan. Lower monthly payments over a longer period of time may be a more affordable option.
Next, you will fill in the following inputs for the line of credit (HELOC) portion of the calculator:
You will then be able to see your scheduled or monthly payments and the total amount in interest you’ll pay on your loan.
- Loan Rate. On a line of credit, your interest rate will fluctuate throughout the life of your loan based on market conditions periodically reset by your lender. A line of credit can be an attractive option if you can lock in a competitively low-interest rate for a few years with an aggressive repayment plan. You will only be required to pay the interest on your line of credit during the draw period, which usually lasts 5-10 years.
- Payoff Period. This is the term over which you will pay back your loan, usually issued in 20-year terms. More aggressive monthly payments mean you won’t have to worry about budgeting for upwards market swings that can significantly increase your monthly payments.
Which One Should I Choose: The Home Equity Loan or Line of Credit?
If you know you need a large lump-sum payment for a one-time purpose, choosing a home equity loan might be your best option. It allows for you to financially plan and budget for evenly dispersed scheduled payments at predictable rates over a negotiated term.
HELOC loans are great for homeowners who need financial flexibility from their loans. Think of someone who is planning a long-term home renovation that will need to be financed periodically in stages. It’s convenient because you have access to cash in the amount you want as needed while only required to pay down the interest on your loan’s outstanding balance.
There are upsides to paying off both loan types earlier, mainly based on the amount you’ll save in interest. For longer loan terms, a home equity loan will have predictable monthly payments, but you may pay thousands in interest over the life of your loan. HELOCs require more risk management and are susceptible to market changes that can be difficult to predict.
How Can The Home Loan Expert Help?
Comparing loan types before choosing how to leverage your home’s built-in equity is a great way to set yourself up for success when determining the best deal possible. A loan vs. line of credit calculator is a useful tool when it comes to getting an estimate of what your monthly payments could look like and how much you’ll pay in interest over the life of your loan. Speaking with a knowledgeable lending representative can give you a clearer idea of which loan type best suits your budget and purpose.
For more than 15 years, The Home Loan Expert has been around to help guide homeowners on how to position themselves better financially with an equity-based loan. Our friendly lending Experts come from the same communities we serve, meaning we can relate to our clients and understand your needs. We are versed in your needs as homeowners and will meet you with a financial plan of action that honors your unique financial situation. We also have an in-house underwriting process that can get your loan approved as quickly and painlessly as possible with closing times in as little as two weeks.
Call us at 800-991-6494 so we can discuss further which loan type best suits your needs as homeowner and to help you find out how you can select an equity-based loan type that you can use to leverage yourself into a better financial position today.
