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For Every Loan, a Proper Use
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That depends largely on how homeowners want to use the money and how comfortable they are with fluctuating monthly payments, financial professionals say.
Homeowners who plan to use a loan for one big-ticket purchase, such as a home renovation, and then pay off that loan in a specific time go with a home-equity loan, said Deb Levy, vice president in the D.C. office of Bank of America Mortgage. This loan, with its fixed payment schedule and payoff length, appeals to those seeking a stable source of short-term income, she said.
Those homeowners who want the ability to borrow money on their own terms, and only when they need it, would be happier with a HELOC, Levy said.
Another difference between the two products that may affect a consumer's decision is that home-equity loans come with a fixed interest rate for the life of the loan, whereas HELOCs do not.
"There is a certain amount of comfort with a home-equity loan," said Matthew Rosov, a loan officer with Fairfax-based Premier Mortgage.
"Borrowers know exactly what their monthly payment is going to be. The interest rate doesn't fluctuate. Some consumers are more comfortable with that. It's all a matter of comfort and what it is that a consumer wants."
Other borrowers prefer the flexibility that comes with a HELOC, Rosov said. People can control how much they pay each month by borrowing only what they need then, he said.
"Normally, when I explain the differences between the two products, most consumers go with the HELOC," Rosov said. "With the variety the HELOCs have, they usually end up being the better tool for most consumers."
Stevens, from Long & Foster, agreed: Most borrowers, once they understand the differences, prefer the credit line.
"People want the loan available for its flexibility," Stevens said. "If they need quick cash for any reason, a HELOC is a good option. Maybe after they move, they need money to remodel their basement or buy a washing machine. Many times, people get a HELOC and never draw down on the balance whatsoever. It's just there for flexibility. That's very typical. I even did that on my home."
