Both home equity loans and home equity lines of credit (HELOC) are ideal for homeowners looking to fund their next financial goal. You get to use your home as collateral, which is perfect for borrowing money against, especially if you’ve already paid down a significant chunk of your mortgage. However, although similar, these financial options don’t work out quite the same, nor do they always provide the same result.
To utilize either option to your advantage, you’ll need to know the ins and outs of both. Keep reading to learn the critical differences between a home equity loan and a home equity line of credit in Ontario.
Home Equity Loan
A home equity loan is a fixed-term loan that is taken out based on the built-up equity of a homeowner’s property. These loans are often referred to as a “second mortgage.” To take out a home equity loan, all you have to do is apply based on your needs. If approved, you’ll get the money in a lump sum amount upfront, with a fixed interest rate and a monthly schedule for pre-fixed payments.
What is important to note here is that your home equity will work as collateral. For this, there needs to be enough equity existing in the home. Lenders will determine if it’s enough based on how much of the mortgage is already paid off. Some other qualifying factors include the combined loan-to-value ratio and credit score.
A benefit of home equity loans is that the interest rate is fixed, with equal amounts applied through the loan’s lifespan. The loan term can be anywhere between five and 30 years, but your interest rate will be locked in for the entire period. This means you can set an accurate budget and map out your financial goals around this fixed amount.
Home Equity Line of Credit (HELOC)
A HELOC allows borrowers to take out money against the credit line up to a preset limit. The borrower then makes the payments, and is then able to take money out again. This is unlike a home equity loan, where the borrower receives all the funds at once. With a HELOC, the borrower can tap into the line of credit when it is needed. This then affects the minimum payments, which are dependent on the total amount borrowed.
With a HELOC, too, the credit is secured through the equity in your home. However, unlike a personal loan or credit card, a HELOC is secured. Since your home is collateral, any missed payments can lead to the foreclosure of your home.
Another critical point to note is that HELOCs have a variable rate of interest. The rate is subject to change, and can increase and decrease as rates fluctuate. However, some lenders do offer a fixed interest rate, so be sure to check with your borrower on that front. HELOCs also provide the flexibility to borrow as much or as little as needed, although this is subject to the credit limit. The borrower also knows the maximum they can potentially take out, which is beneficial for budgeting and financial planning!
What’s the difference?
One of the main differences between the two options is that HELOCs offer variable interest rates, while home equity loans offer fixed rates. The payments for home equity loans are the same each month, while for HELOCs they can vary over time depending on the amount of money taken out. The reason for this difference is that home equity loans are an up-front lump sum payment, with the borrower able to utilize the money from the get-go.
With HELOCs, however, the funds may be withdrawn as needed, hence the varied monthly payments. When it comes to repayment terms as well, the two options differ. With HELOCs, there are interest-only payments to begin with during the draw period. The principal amount and interest need to be paid back afterward. Borrowers opting for home equity loans will need to start repaying the amount as soon as the loan is disbursed and the payment period commences.
Both loans provide you with cash while borrowing against the appraised value of your property. And both give you the freedom and flexibility to use the funds for whatever it may be, from education to retirement or emergency costs. However, the two loans are two different ways to secure your funding. The option you pick will depend entirely on your financial background, history, and goals.
At Canadalend.com, we believe that a home equity line of credit in Ontario is one of the best ways to borrow money. We have been helping clients secure a HELOC for years, and our expert team ensures you get the best rate possible. We will go over the options available to you, and find the perfect solution for your needs! Be sure to get in touch to set up an appointment for a free personal consultation.