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HELOC vs. Home Equity Loan, What鈥檚 the Real Difference? | Guiding You Forward - YouTube
Channel: Mountain America Credit Union
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(upbeat music)
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- [Krystalina] Hey everyone,
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welcome to the Guiding You Forward podcast
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presented by Mountain
America Credit Union.
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Today we're talking about the differences
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between a HELOC, a home
equity line of credit
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and a home equity loan.
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And thankfully, we have Bret
Butterfield here with us.
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So tell me the difference, we
understand what a HELOC is,
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what's the difference between a
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home equity line of credit
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and just a regular home equity loan?
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- [Bret] Yeah, that's
a really good question.
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So, both of them use the
equity in your house.
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The difference is a home
equity line of credit
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has a variable rate.
- [Krystalina] Okay.
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- [Bret] Typically has more
flexible payment options
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and typically has a longer overall
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term to pay that loan back.
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For instance, most institutions, HELOCs
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will be a 10-year draw
period where you can use it
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just like a credit card for 10 years,
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and then they will have a
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10-year repayment period.
- [Krystalina] Okay.
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- [Bret] Where you have to then pay
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the principal back that you owe
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on that particular loan.
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Whereas a home equity loan
itself, not a line but a loan,
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has a term limit to it,
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a seven year, 10-year, 12-year term to it.
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And those loans are amortized,
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which is a fancy word for saying,
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we have a mathematical calculation that
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determines how much money
you have to pay per month
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to have that loan paid off to zero
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within the term of the loan.
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- [Krystalina] So similar to my mortgage?
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- [Bret] Exactly like a first mortgage.
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- [Krystalina] Okay, okay.
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- [Bret] Yep, and that's how those work.
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They don't, you can't take the money,
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pay it back, use it again,
pay it back, use it again,
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that's not how a home equity loan works.
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A HELOC does, but a home equity loan
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is just like a first mortgage.
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- [Krystalina] Okay, so I
get that lump sum upfront.
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- [Bret] Yup, lump sum.
- [Krystalina] And then
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kind of pay that back...
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- [Bret] Exactly.
- [Krystalina] throughout that term.
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Cool, okay, awesome.
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So what are the, I mean, benefits of using
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one versus the other?
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Or does it depend on just
a person's situation?
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- [Bret] It depends on a person's
situation, quite frankly.
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And it depends on a person's
personality as well.
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- [Krystalina] Okay.
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- [Bret] We will have
members who will come into
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the credit union
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and they'll say, "I want
a home equity loan,"
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and we'll say, well, we've got
a home equity line of credit,
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we've got a home equity loan.
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And some will say, "No, no, no,
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I want a loan, not a line of
credit. I don't trust myself
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to be able to pay those
funds back without discipline
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and a home equity loan
with its amortization
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will force me to make the
right amount of payment
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every month and pay that back,
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therefore, it's safer for me
to use that particular loan."
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But then you have those
who will come in and say,
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"I need flexibility, I
need to be able to use this
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for different purposes, for instance."
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Where maybe I'm gonna intend
to buy a car, pay it back.
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I intend to finish my
backyard, pay it back.
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I intend to finish my
basement, pay it back.
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I intend to consolidate
some loan, pay it back.
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They need more flexibility,
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and they like more
flexibility in the payments
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and what they can do with their money
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to use it over and over again.
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- [Krystalina] But discipline, right.
- [Bret] But discipline
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Yeah, well, and quite frankly,
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it will discipline you to a certain degree
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because you can hit your max limit
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and then you can't use it anymore.
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- [Krystalina] Sure, sure.
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- [Bret] So if you want
to be able to continue
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to use that money,
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you've got to be able to
pay the principal back
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before you can use it again, so.
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- [Krystalina] Yeah.
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- [Bret] But yes, those who have plans
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and have budgets in place,
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they use the flexibility, can do that.
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You know, and another
thing that reminds me of,
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you asked me what else people
use lines of credit for?
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We do have a number of members
who use lines of credit
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on their home for their small business.
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- [Krystalina] Oh, okay.
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- [Bret] So they'll come and they'll get a
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home equity line of credit
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and they'll use that line
of credit for funding
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whatever they need in their
own home small business,
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whether it's a landscaping company
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or whatever the case may be, so.
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- [Krystalina] Very, very cool.
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And the state that we're in right now,
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thank you COVID for this wonderful
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state that we're in right
now, small businesses,
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that might be a really
cool option for them.
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- [Bret] Yes, exactly.
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They can go through small
business administration loans,
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they can get some
unsecured loans, perhaps.
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- [Krystalina] Yeah.
- [Bret] But you're not gonna be able
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to get probably the amount
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that you could get through
a home equity loan.
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So there are many of
our members who come in,
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who have small businesses
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and it gives them the
flexibility to have some cashflow
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to keep their business running
the way they need it to.
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- [Krystalina] Very, very cool.
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So speaking of the
housing market right now,
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I mean, it's a little
crazy, maybe not crazy,
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I don't know, how do we describe this?
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- [Bret] Here in the state
of Utah, it's a little crazy.
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Yeah, there's no question about that.
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Home values are at all-time highs
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and homes are selling like
they're going out of style.
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- [Krystalina] Yeah.
- [Bret] So it's really easy to
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put your home on the market
and sell it these days
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and pretty much get
whatever you want for it.
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I was recently chatting
with a real estate agent
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who was trying to sell a home
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and they got 19 offers on the one house.
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- [Krystalina] Oh, good grief.
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- [Bret] Yeah, and all of them were trying
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to outbid each other.
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So it's a crazy market
right now, but it does allow
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for most people to have
equity in their homes,
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to be able to get home
equity lines of credit
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or home equity loans, and so
it is favorable market for
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home equity lending at the moment.
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- [Krystalina] Awesome, awesome.
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So when exactly should I get a HELOC?
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- [Bret] Yeah, that depends
on your personal situation.
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- [Krystalina] Okay.
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- [Bret] The ideal time to
get a home equity loan is,
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well, a couple of factors.
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Number one, if you need it.
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if you need it for your small business,
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or you wanna add some value to your house
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or your yard or whatever the case may be.
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But you also have to be able to make sure
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that you've got the money
to be able to pay it back.
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I personally don't think it's a good idea
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to take a loan out
hoping that in 10 years,
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somewhere down the line
I'll hit a cash cow
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and be able to pay it back.
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Hoping and wishing
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I don't think is a very
good financial plan.
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So those who come and get HELOCs,
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I think should always have a plan in place
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to know that they'll have
the ability to pay it back.
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That doesn't mean they have
to pay it back right away.
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- [Krystalina] Sure.
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- [Bret] But if they have a plan in place
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that can pay it back
over a number of years
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and they can keep that payment,
then I think that's okay.
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But I don't think it's
a really good idea to
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come and take out $250K,
$300,000 on your house
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saying I have no idea how
I'm gonna pay this back,
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but I'll figure it out someday.
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- [Krystalina] Fair enough.
- [Bret] Yeah.
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- [Krystalina] Fair
enough, so would you say,
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this is a random question.
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Obviously when it comes
to saving money, right,
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we wanna have those emergency
funds in place, right?
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That's budgeting 101,
have your emergency stash.
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- [Bret] Yes.
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- [Krystalina] Do you
view a home equity loan
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or line of credit
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as an option for that?
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- [Bret] I certainly do actually.
- [Krystalina] Okay.
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- [Bret] I know a particular
member, for instance,
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that came in and said, I
only have a little bit of...
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it was like $50K or $60,000
left on my first mortgage.
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And I wanna be able to pay that off.
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And I have the funds to
be able to pay that off,
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but it's gonna dry my savings up.
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So what I'm going to do is
I'm gonna take my savings,
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I'm gonna pay off that first mortgage,
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and I'm gonna get a home equity loan
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for about $50K or $60,000.
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And just have that sitting
there just in case.
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- [Krystalina] Okay.
- [Bret] And if I need it,
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I'll draw on it, but if I don't need it,
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I've saved myself a whole bunch of money
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by paying off my first mortgage.
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It turned out perfectly for them.
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They paid it off, they got the HELOC,
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they never had to draw on it.
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And now they just have that
home equity line sitting there
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for in case of emergencies.
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But in the meantime,
they've also been able to
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increase the savings that
they've been able to put
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in the bank, so to speak,
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because they don't have a
mortgage payment anymore.
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And that payment, that
money is now going towards
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their savings.
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- [Krystalina] Yeah, imagine if we
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didn't have mortgage payments,
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how much money we could save?
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- [Bret] Right, exactly.
- [Krystalina] Yeah.
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- [Bret] And by paying off $50,000
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they ended up paying off their loan about
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eight or nine years early
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and saved themselves a
lot of money in interest.
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Now I personally have a
home equity line of credit,
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I don't have anything on it right now,
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but I keep it for emergency purposes.
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- [Krystalina] Okay.
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- [Bret] Just in case you,
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you never know with medical expenses
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and COVID is a great example
of what can suddenly hit you
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inside of the head, right?
- [Krystalina] Yeah.
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- [Bret] So I have that
sitting there ready to go
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in case I need it.
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- [Krystalina] Okay, I love that.
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Thank you so much for joining us today.
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- [Bret] My pleasure.
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(upbeat music)
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