Compare HELOCs with Other Borrowing Solutions
Choosing between a home equity line of credit and other lines of credit
When it comes time to finance your next home improvement project, pay for education,
consolidate debt or even prepare for an unexpected expense, you might be considering
a line of credit. If you are, you will have options that range from a
home equity line of credit (HELOC) to unsecured signature lines. It is important
that you compare each line of credit in order to make the borrowing decision that
best fits your needs.
A home equity line of credit requires positive equity in your home
Many consumers begin their borrowing decisions by choosing between a secured home
equity line of credit and various other secured and unsecured lines. While there
are many differences in the specifics, the main difference is that a HELOC borrows
against the existing equity in your home. So, if you are interested in a home equity
line of credit, you have to own a home and have accumulated equity in that home.
If you are not a homeowner or if there is not an adequate amount of equity in your
home, you will have to consider other options.
How to compare a HELOC to other lines of credit
When it comes time to compare a HELOC with other credit lines, you can start by
understanding the primary differences in your borrowing options.
Secured vs. unsecured lines of credit: A secured line of credit, such as
a home equity line of credit, provides the lender with collateral to collect in
the event that you default on your payments. In the case of a HELOC, the collateral
is your home. Various types of collateral besides a home can be used to secure a
line of credit, but that collateral must be an item of value approved by the bank.
An unsecured line of credit is given without collateral and instead is based on
your merit as a borrower.
Interest rate: Because the lending risk is lower, a home equity line of credit
typically has a lower rate than an unsecured alternative.
Variable vs. fixed interest rates: Most secured lines of credit, including
a home equity line of credit, are loaned at a variable rate, which means the rate
can change over the borrowing period based on the Prime rate. Credit cards are lines
of credit that have either a variable rate or a fixed rate. Take note that credit
card rates are often higher than HELOC rates, so consider that in your decision.
Approval time: Getting approved for a HELOC can take a bit more time than
approval for an unsecured line of credit because there are more elements to the
application and approval is preceded by property appraisal. Be sure you are prepared
when going through the
home equity application process with our helpful checklist.
Fees and closing costs: A home equity line of credit may be subject to closing
costs similar to those for closing a mortgage. The closing costs can include cost
for appraisal, title insurance fees, documentation fees and more. In some cases
the lender will pay these costs on behalf of the borrower. HELOCs may also be subject
to annual fees and early termination fees. Other lines of credit may be subject
to annual fees, balance transfer fees, and more.
Tax-deductible interest: In most cases, interest on a HELOC is tax-deductible
just like the interest on a mortgage. Be sure to consult with your tax advisor regarding
eligibility. Interest accrued on unsecured lines of credit is not a deductible expense.
Consequence of default: When you default on a secured line of credit, you
are putting your collateral at risk. For example, by missing required payments on
your HELOC, you are giving the bank the ability to recoup its money by pursuing
your home. When you default on an unsecured credit line, you are doing damage to
your credit score and borrowing ability, but it generally does not impact your other
Apply for a home equity line of credit from Citizens Bank
Whether you are considering borrowing against your home equity or would like more
information about other borrowing options, you will find what you need at Citizens Bank. If a home equity line of credit is right for you and you're ready to apply, you can start the HELOC application process online by telling us a bit about your borrow needs, and we'll contact you by the end of the next business day to complete the application. For more information on credit lines and other personal borrowing options, speak with a Home Loan Advisor.