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Home Equity Loan vs. Line of Credit: Which is Right for Me?

Home Equity vs. HELOC: Why a line of credit puts more flexibility in your tale.

Everyone loves a good comeback story. Less than a decade ago, Phoenix was one of the hardest-hit markets in a nationwide collapse of the housing bubble that ended with a slew of foreclosures and short-sales. According to a 2016 Realtor.com prediction reported on by Phoenix Business Journal and AZCentral.com, the Phoenix metro area is now poised to be at the top of the real estate food chain in 2017-beating out Los Angeles for the #1 spot.

With home values expected to rise 5.9% over the next year, 2017 is an ideal time to take out a home equity loan and write the next chapter of your family's story. Do you know which type of loan will help you get to your fairy-tale ending?

A standard home equity loan takes into account the value of your home versus what you still owe on your mortgage. The larger the difference between the two, the more loan money you may be eligible for. The borrower receives a fixed-amount loan and makes monthly payments, much like one would with a mortgage or auto loan. Your current home is used as collateral for the home equity loan, which means that you'll want to keep up on payments to avoid late penalties and a possible foreclosure.

A second option is a home equity line of credit, or HELOC. This type of loan also takes into account the equity in your home and uses your residence as collateral. Interest rates are typically higher than first mortgage rates. However, its lengthy draw period, variable APR and easy repayment make the HELOC a more flexible option than standard home equity loans. Here are four reasons why a HELOC may pave an easier path to your happily-ever-after.

  1. It's like having a genie in your pocket.

    In practice, a HELOC works much like a credit card. Or a magic lamp. So you're not limited to a single project on your wish list. Borrowers have a set limit (for example, $70,000) and can take out as much or as little of that as they want. Redo your kitchen for $50,000 this year, and you'll still have $20,000 left in your HELOC to use for projects later on.
  2. Refills are an option.

    Unlike traditional home equity loans, a HELOC allows you to re-use part of your loan after you pay it back during the draw period! How does it work? In the example above, you started with a $70,000 HELOC and used $50,000 for your dream kitchen. You now have a gourmet chef's kitchen to rival The Barefoot Contessa's, but your bathrooms are looking more shabby than shabby-chic, and it'll take $30,000 to get your powder rooms up to snuff. That's a total of $80,000 for kitchen and baths. Solution: Pay back $10,000 of your initial $50,000 loan during your draw period, and those funds will become available to you again-giving you the extra loan money you need to finish your dream home.
  3. You can take your time.

    The amount of time you have to use your HELOC funds is called the “draw period.” Most HELOCs come with a ten-year draw period, though some financial institutions offer up to 20 years. Monthly payments during the draw period are applied to interest only.
  4. It piques (but not peaks) your interest.

    When you choose to withdraw part (or all) of your HELOC funds, that portion of the HELOC is instantly locked in at the current interest rate. So if you withdraw funds at a rate of 4.5% today, you'll pay back those funds during the repayment period at 4.5% APR even if interest rates have gone up by then. Not loving today's interest rate? With a HELOC, you can wait for rates to drop before using additional funds.

In 2017, high home values will open new doors to make the upgrades and changes you've always dreamed of. Whether you choose to remodel all at once with a home equity loan or space out your renovations using HELOC funds, this year you may finally have the option to turn your current home into your castle-moat optional.