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HELOC Loan vs. Unsecured Loan
Pros and cons of these loans for homeowners in 2018 (do the new tax laws make HELOC a less attractive?)
If you own your home and have equity, you may be considering getting a home equity line of credit or HELOC. This is a second mortgage that taps some of the equity in your home so you can use the money for what you like. You might want to remodel your kitchen, pay for college, or pay off credit cards.
As home values continue to rise in 2018, millions of Americans have more equity in their home than ever before. A HELOC is a potential option. But there are alternatives. You also can get a personal loan instead of tapping your equity. Which is best for you? Below are the pros and cons that will help you decide.
More About HELOC Loan Products
A HELOC is a line of credit that you borrow against the equity in your property. If you owe $300,000 on your house that is valued at $500,000, a home equity line of credit may allow you to borrow against your $200,000 in equity. You can use that money for whatever you like.
A HELOC is a revolving line of credit that you can pay back and use again if you like. HELOCs have a variable interest rate that can rise and fall with time. The interest rate at the beginning is usually a low, introductory rate. The draw period on the loan is usually 10 years. During this time, you may only pay interest. After that, you need to pay interest and principal.
Should you get a HELOC? Here are some of the advantages and disadvantages:
On the positive side, a HELOC has a low interest rate compared to a personal loan. You are borrowing money against the home you live in. This is a lower level of risk for the lender because most people are going to pay a loan that is secured by their personal residence. A secured loan such as a mortgage always has a lower rate than an unsecured loan such as a personal loan.
A HELOC is a revolving line of credit that can be used multiple times. It also is usually not that difficult to get approved for if you have been paying your first mortgage on time for a few years. But you will need to pay for a home appraisal, and there are closing costs to consider.
A HELOC is one of the most popular ways for people to tap their equity because of the low interest rate. The interest on the loan is also usually tax deductible.
On the down side, a HELOC is secured by your property. If you do not pay your loan, you could lose your home. This is what happened to millions of people during the mortgage crash. They could not afford their home loan anymore after the rates went up.
A HELOC's interest rate can rise over time. It is tied to an index rate, such as LIBOR, and over the years, rates can go up. We are in a rising interest rate environment today, so you can expect your HELOC rate to go higher after the draw period ends.
Also, there were tax law changes this year that mean you can only deduct the mortgage interest on the HELOC if you are using the money to improve your property. If you use the money to pay off credit cards, you cannot write off the interest.
About Personal Loans
A personal loan is unsecured by property. They have become an alternative to HELOCs and home equity loans in recent years. After the mortgage crash, many Americans are leery of borrowing against their home. The loan is unsecured, so the rate is higher, but if you do not pay it, at least you do not risk losing your home (you will have damaged credit, of course).
Personal loans are usually fixed rate loans and you can borrow the lump sum of money to use as you like. You know what you are going to pay each month and for how long. Interest rates are determined by your credit score and history.
The process to get a personal loan is usually easy and the fees and costs are lower than a HELOC.
The Bottom Line on HELOC vs Personal Loans
If you have significant equity in your home and you can pay closing costs, a HELOC is a good choice. You will get a lower rate and you can often write off the mortgage interest. Also, if you need a lot of cash, well over $50,000, borrowing equity is probably the best move.
But remember that you are borrowing against your home and the rate can go up. If you do not have a lot of equity and/or do not want to pull out equity that you have, you may want to get a personal loan, even with a higher interest rate.
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