 | Mike Sikes
is Senior Vice President and Chief Lending Officer for Prairie State Bank. He has over 24 years of banking experience. Mike is a member of the Wichita Area Builders Association, the Wichita Area Association of Realtors and serves on the board of directors for the Boy Scouts of America Quivera Council. You may contact Mike at (316) 775-5434 or msikes@prairiestatebank.com |
Banking & Finance
2004-08-01 08:22:00
Home equity and HELOC
Question: What is the difference between a home equity loan and a HELOC?
ANSWER: A home equity loan and a HELOC (home equity line of credit) have several things in common, however there are also several very important differences. On both types of loans the borrower uses their home as collateral and the proceeds are typically used for home improvements, a child's education, a new vehicle, vacation or many other things. The interest on both types of loans is also generally tax deductible. Consult your tax advisor to determine deductibility.A home equity loan allows you to borrow a certain amount of money that is repaid over a term of 5-20 years, normally at a fixed interest rate, much the same as a car loan or home loan. Home equity loans are ideal for borrowers who have an immediate need for a fixed amount of money and want to know exactly what their payments will be each month. Unlike a HELOC, a home equity loan does not give you the option of re-advancing up to the original amount of the loan as you pay down on the principal balance.A HELOC works much the same way as a credit card. You will be able to borrow a certain amount of money which is available for you to access as needed. Typically this money is accessed by writing a check. You can access all or a part of the funds and then repay to the lender a set amount monthly based on the amount you have drawn on the loan. Lenders typically will require you to pay a minimum of the interest due on the amount drawn, however some lenders will require a payment of 1.0%-2.0% of the outstanding balance. On a HELOC as you reduce the outstanding balance you will be able to re-advance the loan funds up to the original amount of the loan. The interest rate on a HELOC is typically a floating rate at least 1%-2% above the Prime rate depending on the lender. HELOC loans typically set a fixed time during which you can borrow money, normally 10 years, and at the end of this period you may be able to renew the credit line or you may be required to either pay the balance in full or repay the balance over a fixed period of time. Both types of loans are popular ways to borrow money for larger expenses, however when looking at these types of loans it is important to remember that your home is at risk and you should get all the details about loan costs, terms and interest rates prior to closing the loan.
