Home Improvement

The Difference between A HELOC and A Home Equity Loan

Homeowners build equity by submitting monthly mortgage payments. Equity can be used to borrow money back from the lender under any circumstances as long as the borrower qualifies for the program. In most cases, the borrowers get either a home equity loan or a home equity line of credit when borrowing the money.

How to Accumulate Equity

Homeowners accumulate equity by paying off their mortgage. The more the buyer has paid on the mortgage, the more equity they have built up. Homeowners who are in good standing with their lenders have the option to use their equity for a variety of tasks including home improvement projects. They have the option to take out a home equity loan or start a home equity line of credit.

What is a HELOC?

A home equity line of credit is a line of credit based on how much equity that the borrower has accumulated by paying off their mortgage home loan. The line of credit is accessible for a predetermined amount of time, and the homeowner can access as much or as little of the money as they choose during this period. They aren’t restricted on how much of the equity they can use, but the homeowner cannot borrow more than what they have paid into the mortgage. It is recommended that they don’t use all the equity as this basically starts their mortgage loan over.

How Does a Home Equity Loan Work?

A home equity loan is a lump sum loan acquired from the equity that the homeowner has paid into their mortgage loan. The lender reviews how much equity that the borrower has accumulated and provides them with a loan based on how much the homeowner needs at the time. The homeowner will receive the money one time during this period and isn’t allows to borrow any more money from their equity. The borrower starts to pay off the loan according to the schedule set up by their lender.

What Do Homeowners Have to Do to Qualify?

Homeowners must have a qualifying credit score according to their lender’s preferences. Since they are borrowing from the money they paid into the mortgage, the homeowner must have an excellent credit score and be in good standing with the lender. Their income-to-debt ratio is reviewed before the lender can extend them a home equity loan.

How Do They Use the Funds?

Homeowners can use the funds from either program however they choose. The lender doesn’t place any restrictions on how the funds are used and won’t ask for receipts when the homeowner starts spending it. However, typically, equity is used to improve the property, pay off debts, or cover medical expenses.

Homeowners can use a HELOC or home equity loan to do a variety of tasks, and their lender will review their credit history and scores when extending a loan. Understanding how each program works shows the homeowner what option is best for them. Homeowners who need to borrow a portion of their equity can get information from NRIA now.

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