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If you need to borrow money, you may want to consider tapping into your home equity. After all, the average American homeowner has nearly $300,000 in equity in their home. In turn,tapping into your equity could give you the funds you need for a wide range of purposes. And if you’re going to borrow against your home equity, you have a few options, including home equity lines of credit (HELOCs) and home equity loans. But while both options give you a way to borrow money against your equity, there are important differences between the two.
HELOCs are variable-rate lines of credit that allow you to borrow from your home’s equity (up to the HELOC limit) throughout the draw period. That draw period typically lasts between five and 10 years, during which you typically only have to make interest-only payments. At the end of the draw period, your repayment period starts.
Home equity loans are fixed-rate loans that give you access to a lump-sum loan. And, while you’ll start making payments toward your interest and principal balance right away, the fixed interest rates and payments on these loans mean that your rate won’t change over time. But, which of these options is better this June?
Compare your home equity borrowing options now.
Will a HELOC or home equity loan be better in June?
Here’s when a HELOC may be your better option and when a home equity loan may be the better choice.
When a HELOC may be better this June
“If one believes that rates will fall, the HELOC would be a better choice if the loan is kept until maturity,” explains March Charnet, founder and CEO of American Prosperity Group, a financial planning firm.
And, that’s an important consideration. After all, if inflation continues to cool,as it did in April, the Fed could cut rates in the future, which could make a HELOC your better option this June.
But variable rates shouldn’t be your only consideration. With a HELOC, you’ll have a draw period in which you can access funding multiple times up to your credit line’s limit.
So, if you’re not sure exactly how much money you need, a HELOC may be your better option this June. If you choose a home equity loan and need more money in the future, you’ll typically need to apply for a new loan.
Tap into your equity with a HELOC now.
When a home equity loan may be better this June
Home equity loans come with fixed rates, so you’ll know exactly what your payments will be moving forward, which can make it easier to plan for expenses.
And, “if rates were to rise, it is better to lock in a lower rate for the duration of the loan and therefore the regular home equity loan would be the better choice,” says Charnet.
So, if you believe interest rates could rise soon, a home equity loan may be the better option. And, with persistent inflation above the Federal Reserve’s 2% target, future rate increases are a real possibility.
Home equity loans may also be the better option if you already know exactly how much money you need since you’re accessing a lump-sum loan. And, since you can’t borrow from a credit line with this option, you may not be tempted to tap into more equity, borrowing more money unnecessarily.
On the other hand, if you take the HELOC route, you may have access to more funding than you need, which could lead you to borrow money over and over again, resulting in higher payments.
Tap into your equity with a home equity loan now.
The bottom line
If you’re torn between a HELOC and a home equity loan this June, consider how these financial products may fit with your goals — and what you expect to happen with the overall rate environment. If you expect rates to fall ahead, a variable-rate HELOC may be the way to go. On the other hand, if you expect rates to rise, a fixed-rate home equity loan could be your better option.
Your funding needs should also play a role in your decision. If you’re not sure how much money you need, the flexibility that comes with a HELOC may be helpful. On the other hand, if you know how much money you need, a lump-sum home equity loan could keep you from borrowing for frivolous purposes. Compare your home equity borrowing options today.
Joshua Rodriguez is a personal finance and investing writer with a passion for his craft. When he’s not working, he enjoys time with his wife, two kids and two dogs.
