Home Equity Line of Credit vs Mortgage: Benefits & Differences

A home equity line of credit, or HELOC, has a few things in common with a mortgage. The most obvious similarity is that they are both loans that use the value of a home as collateral until they have been paid off.

Both equity lines of credit and mortgages allow you to borrow money against the equity of your property. The best option for you depends on your situation, on your goals, and on how you are planning to pay back what you have borrowed.

Keep in mind that since your home will be used as collateral for both options, you need to be sure you will have no problem making at least your minimum payments each month. However, there are also many differences between the two, and if you are in need of some extra money, it’s important to choose the best possible option for your situation and your goals.

Let’s learn more about a home equity line of credit vs mortgage, so you can get the one that will be the most helpful to you:

1. A HELOC can be used for different purposes

A home equity line of credit is a bit like a credit card. You will be able to borrow a certain percentage of your home’s equity, and use it for different purposes.

HELOCS are a good option for those who don’t need to borrow a large sum. And they can be used for home improvement projects, to pay back student loans, to pay for college tuition, or for similar expenses.

2. A mortgage is designed to help you buy your home

A mortgage is a long-term loan that can help you buy a home. In fact, for most people, buying a property would simply be impossible without a mortgage.

However, once you own a home, it’s possible to get a second mortgage, even if you are not done paying off the first one. This second mortgage allows you to tap into the equity of your property to borrow a large sum of money which can be used for different purposes, including buying another property.

3. A HELOC has variable interest rates

When you borrow money from a HELOC, you have to keep in mind it will come with variable interest rates. In Canada, for example, the rates for HELOCs vary according to the key interest rates of the Bank of Canada.

What it means is that the minimum payments of your HELOC could vary from time to time. This is even more true since you can keep borrowing more money from your HELOC, as long as you stay within your credit limits.

4. A mortgage can have fixed or variable interest rates

As for mortgages, they can have either fixed, or variable interest rates. If you opt for a variable rate on your mortgage, you can expect the rate to go up and down during your repayment term.

If you choose a mortgage with a fixed rate, this rate could be higher, but it will stay the same while you pay off the money you have borrowed.

5. A HELOC is ideal for short-term borrowing

Most people take out a HELOC when they need a short-term loan. A HELOC usually lasts up to 25 years, during which it’s possible to borrow more money without exceeding the borrowing limit.

This is considered a more flexible borrowing option than taking out a mortgage, especially since it’s possible to make lump-sum payments on a HELOC without any penalties.

6. A mortgage can run for as long as 30 years

A mortgage is not a short-term loan, as they can run for as long as 30 years. When you take out a mortgage, each month, you will pay back a part of your principal as well as some interests.

Depending on the terms of your mortgage, making lump-sum payments might not be allowed, or might come with penalties. It’s best to check with your lender to see whether you can make lump-sum payments, and if so, if the amount you can pay off this way is limited.

7. Not all banks offer HELOCs

HELOCs usually come with lower interest rates than mortgages, and they are considered a low risk loan for lenders. The risk is higher for borrowers, since they are borrowing against their home, and they can accumulate debt if they struggle to pay off their HELOC.

Not all banks offer this type of loan, and it might not be offered by your financial institution.

8. Many types of lenders offer mortgages

Most banks and credit unions offer mortgages. To approve your mortgage application, financial institutions will inquire about any current debts, and will want to see a proof of your income.

It’s also possible to get a mortgage from a private lender, or to work with a mortgage broker who will seek the best possible option for your unique situation.

You Might Also Like