Home Equity Loan vs Personal Loan: Which is Better?

When you need some extra cash for a big expense, you have many options to choose from. Credit card And personal loan Common ones go to many people, but they don’t always offer the best terms. If you’re a homeowner, it’s an option worth exploring Your home equity. By drawing on the value you’ve built up in your home, you can secure better financing rates and enjoy some extra perks to boot.

That said, home equity financing is the preferred option Home equity loan And Home Equity Lines of Credit (HELOCs) Not always the right choice. There are important differences between these three products to understand when trying to decide which one is best for you

Start exploring your home equity options here to learn more

What are home equity loans and HELOCs?

Both home equity loans and HELOCs allow you to access your home equity for whatever expenses you desire.

A home equity loan offers a lump sum, which you begin repaying in monthly installments after you receive your funds. Loan repayments typically last five to 30 years.

A HELOC provides a line of credit that you can access, much like a credit card. During the draw period (usually five to 10 years), you can withdraw as many times as you like. After the draw period, you will start repaying the borrowed amount.

Your home works as a parallel with both these products. That means you risk losing your home if you can’t repay the loan.

See how much you might be able to borrow here.

What is a personal loan?

A personal loan How Home Equity Loans Work: You get a lump sum monthly repayment from the time you receive the funds. Loan repayments usually last two to five years. Unlike home equity products, personal loans are unsecured, meaning there is no collateral the lender can claim if you default.

Home Equity Loan vs Personal Loan: Which is Better?

Home equity loans and HELOCs offer these advantages over personal loans:

• Lower interest rates: Home equity loan And HELOC rates Currently the average is around 7% to 8%. Average personal loan rates, by contrast, range from 8% to 36%, depending on the lender and you Credit score. This can cost you significantly more when paying off the loan.
• Greater Loan Limit: Personal loans are usually capped at $100,000. With a home equity loan or HELOC, you May be able to borrow up to $1 million.
• Tax Benefits: You may be able to deduct the interest on a home equity loan or HELOC if you use the funds for an IRS-approved home improvement. “Home equity loan interest and lines of credit are deductible only when the borrowed funds are used to purchase, construct, or substantially improve the taxpayer’s home that secures the loan.” The IRS Says “the loan must be secured by the taxpayer’s principal home or second home (qualified residence) and meet other requirements.”

A personal loan may be right for you if:

• You don’t have much home equity: You generally need to have 15% to 20% equity in your home to draw from this. Of that equity, you can typically borrow 80% to 85%. Home equity is based on Your outstanding mortgage balance and the current value of your home. So, if your home has depreciated or you haven’t paid much on the mortgage, you won’t be able to borrow more from your equity (if you’re able to borrow at all).
• You need funds fast: If you are approved for a personal loan, you can get the funds as soon as the next business day. Home equity loans and HELOCs, on the other hand, can take anywhere from two weeks to two months off.
• You only need a small amount of: You can get a personal loan for as little as $500. Home equity options typically require a minimum loan of $10,000 to $30,000. If you don’t need a large amount, there’s no point paying for the extra closing costs and interest that come with home equity options.
• You don’t have excellent credit: If you have bad credit, you’ll likely get higher rates and worse terms than someone with good credit. However, at least you have a chance to get a personal loan. Lenders generally won’t give you a home equity loan or HELOC if you have a score of 600 or below.
• You don’t want to put your home at risk: Regardless of the product you choose, you should never borrow more than you know you can repay. That said, if something happens to your finances and you default, your home is not at risk of a personal loan.

Explore your personal loan options here to learn more.

Bottom line

As with any financial product, it’s important to weigh the pros and cons against your needs. Home equity loans, HELOCs and personal loans are all viable financing methods. Which one is right for you depends on your situation and goals. Research your options carefully to determine the best route for you