Homeownership: more than just the cornerstone of the American Dream, it can be a powerful tool for improving your financial future. While renting can be a smart financial choice for someone starting out or starting over, owning your own home offers a multitude of benefits—not the least of which is the ability to build equity.
For practical purposes, equity can be defined as the difference between your home’s value and the balance owed on your mortgage. Since most mortgage installments are comprised of interest and principal amounts, each payment chips away at mortgage’s remaining balance, resulting in a larger difference between the property’s value and what you still owe. That difference is your equity. And while equity is reassuring in theory, it can be even better when you make that equity work for you.
Loan vs. Line: Find the right home equity option for you.
Because your house’s value offers relatively stable collateral, equity lenders assume lower risk than creditors offering unsecured loans or credit lines. Less risk for the lender means better rates for you. Traditionally, home equity loans and lines of credit feature more attractive interest rates than credit cards, making them ideal for larger purchases. But before you decide to put your equity to work for you, it’s important to know the difference between a Home Equity Loan and a Home Equity Line of Credit. Understanding the benefits of each can help you determine which is best for you.
Home Equity Loan
By allowing you to borrow a lump sum at once, these loans let you lock in an interest rate and payment terms for the length of the loan. While interest is charged on the total amount from the beginning, the security of a fixed rate makes home equity loans a reliable choice for larger projects that involve one-time expenses. Popular uses for home equity loans include:
- Home renovation projects
- Consolidation of high-interest debt
- Establishing an emergency fund
Essentially a credit account that allows you to borrow against the equity in your home, a HELOC gives you a cost-effective way to access the funds you need only when you need them. While you can borrow smaller amounts at a time, a HELOC usually features an adjustable interest rate tied to the standard market rate. Depending on the current financial climate, this could lead to fluctuating interest rates and payment amounts over time. However, since you can borrow smaller amounts and pay interest on the amount borrowed as opposed to the full credit limit, this option is ideal for gaining access to funds while maximizing your cash flow. Common uses for a Home Equity Line of Credit include:
- Smaller home improvements
- Funding a small business venture
- Higher education expenses
As with any major financial decision, it pays to discuss all the details with a financial expert. So, before you decide which home equity option is right for you, schedule an appointment with a Scient representative mortgage specialist to determine the best solution for your financial needs.