Personal Loans vs. HELOCs: Which is Right for You?
December 8, 2021 by Chevron Federal Credit Union
Did you know that the average homeowner today has amassed record levels of home equity? It’s true. The latest CoreLogic Home Equity Report found that the average amount of equity per borrower reached dramatic new highs within the last year and more than doubled in the last decade.
Home demand continues to exceed supply, which has fueled rapid, red-hot home price growth over the last year. The key takeaway for you? With every monthly mortgage payment, you’re gaining more value — or equity — in your property. And, while it’s still a seller’s market, you don’t have to wait until you sell your home to access the value you’ve built, whether you’re eyeing more flexible purchasing power or a home remodeling budget.
Home equity lines of credit (HELOCs), personal loans and personal lines of credit can all be helpful borrowing tools for these and many other reasons. Still, today’s historic housing trends may make one a better option than the other, depending on your needs. To clarify the distinctions between them, let’s take a closer look and highlight some pros and cons to keep in mind.
What is a personal loan, and what is a HELOC?
A personal loan is usually an unsecured installment loan, which means no collateral is required. If approved, you receive an entire sum up front to use as you choose. That money must be repaid, with interest, in regular installments that begin right away and continue over the length of the repayment term. A personal line of credit is also a type of unsecured loan that works like revolving credit. If you qualify, you can tap funds as needed for purposes you choose, drawing against a set credit amount. And you only pay interest on the money you decide to pull out.
A HELOC is a type of loan in which you borrow against the equity in your home or the home’s market value minus the balance you owe on the mortgage. Because HELOCs use your home as collateral, they generally have a more competitive interest rate than other types of credit lines. Instead of receiving a lump sum, you receive a revolving line of credit that can be tapped as needed, for any reason, over a defined time period. The line of credit offered will depend on the amount of equity in your property. You pay monthly accrued interest on the outstanding balance and repay the principal amount at a later date.
What are the pros and cons of a personal loan?
A personal loan has several benefits and drawbacks that you’ll want to weigh. Here’s a quick summary:
- Regular, predictable payments that stay the same
- Good for defined expenses with known, one-time costs
- Tend to have fixed interest rates that won’t change over the life of the loan
- Some lenders may charge loan application, origination or prepayment fees
- Adds to existing debt obligations, with required monthly payments
- Potential to end up paying more in interest over the full loan term, even if you could have paid it off sooner
What are the pros and cons of a HELOC?
HELOCs are a flexible way to use your home’s value to fund other financial goals. Here’s a rundown of advantages and disadvantages to keep in mind:
- Ability to draw small sums periodically, as opposed to one lump sum
- Good for funding different purposes with varying amounts
- Competitive interest rates that will only be charged when you take out money and may be tax-deductible if funds are used for home improvement
- Interest is usually variable vs. fixed
- Usually requires a check of creditworthiness, income and debt review
- Some lenders may charge maintenance and transaction fees every time you tap the credit line
When to consider a personal loan
A personal loan may fit your needs in circumstances where you’re looking to fund a single purchase, cover a one-time, major expense or consolidate debt. For instance, maybe a personal loan could help consolidate credit card balances at a much lower interest rate or help eliminate other debt altogether.
When to consider a HELOC
Because a HELOC means borrowing against your home — most likely your biggest investment — many homeowners pick HELOCs for home remodeling projects, which are expected to remain immensely popular through 2022. (However, if you plan to relocate soon, be aware that you must pay off your HELOC’s balance when you sell your home.)
When comparing a HELOC and a personal line of credit, an important factor to think about is the maximum amount you need – and can actually borrow. With a HELOC, for example, the amount you’ll be able to tap will depend on how much equity you have in the home. That means the longer you’ve owned the home and the more payments you’ve made towards it, the larger the amount of funds is that you can access. What if you don’t have a lot of built-up equity in your home or feel uncomfortable with using your home as collateral? With a personal line of credit, financial factors like your credit history, income and debts will determine how much you may be approved to borrow and draw from.
Is a HELOC a good option for you?
Increased equity in your home means you could be approved for a higher credit line today than you would be if the market were different. That’s why if you’ve been thinking about tackling that much-wanted bath or kitchen renovation — or even just a home office upgrade or kid-space refresh — now could be the right time to explore a HELOC. At Chevron FCU, HELOCs are available for up to $350,000, depending on your credit and your home’s value. Learn more about maximizing your biggest asset today.