Personal Loan vs Home Equity Loan

Lets compare two very popular finance options in 2024, the home equity loan and personal loan and uncover the similarities and differences so you can make a wise financial decision.

Which Is Better for You, Home Equity Loan, HELOC or Personal Loan?

Do you need money to pay for major expenses, such as medical bills, home improvements, or college tuition?

Many homeowners in 2024 are thinking about ways to pay for large-ticket expenses, and two possible options are a secured credit line, home equity loan or personal loan.

What are these loans about and which is best?

Learn more in this article, then talk to one of our loan professionals if you need help or want to apply!

Is a Personal Loan the Same as a Home Equity Loan?

Home equity loans and personal loans are both fixed-rate, lump-sum financing options, but they differ in several key ways. Personal loans are unsecured, meaning your rate is determined by your credit and income. Home equity loans, on the other hand, usually offer lower rates because they are secured by your home, which serves as collateral for the loan.

What Is a Personal Loan?

A personal loan is an unsecured loan that some people get if they can’t get or don’t want a home equity loan. Personal loan funds are unsecured, so you don’t risk your house if you default. However, a personal loan often has a higher interest rate than a second mortgage or equity loan.

Personal loan funds are generally faster to qualify for because you don’t have to go through the underwriting process. If you have good credit, you could get a personal loan in the 8-10% range. But if you have lower credit scores, the rate could be much higher.

Reduced fees: Numerous personal loans waive origination fees or closing costs, saving you money upfront.

Faster approvals: Receive a prompt decision from underwriting on your personal loan application within hours of submission.

Fast access to funds: Certain unsecured loan programs disburse funds shortly after approval, ensuring quick access to cash.

What Is a Home Equity Loan?

A home equity loan or home equity line of credit, also know as HELOC are second mortgages that allow the homeowner to take out part of their equity in cash. The second mortgage can be either a fixed or variable rate loan that is paid back over many years.

Homeowners could qualify to take out up to 80% or 85% of their home’s value, including what they owe on the first mortgage. Getting a home equity loan can be a good financial decision to get the cash you need because the interest rate is lower than most unsecured loans.

Competitive mortgage rates: Enjoy interest rates significantly lower than credit card APRs and often lower than other unsecured loan options.

Debt consolidation: Lenders offer simple interest solutions to refinance credit card debt into an installment loan that offers lower fixed rates and monthly payments. Compare HELOCs for debt consolidation vs personal loans.

Money for significant expenses: From essential home renovation to funding a dream wedding, a home equity loan offers a fixed, predictable cost, simplifying budget management. With your home as collateral, these loans often provide generous borrowing limits to cover substantial expenses.

Easier credit requirements: Borrowers with credit scores below 600 may still be eligible for an equity loan if their debt to income ratio and loan to value are low enough. If you have late payments being recorded on your credit report, consider a HELOC for bad credit.

A home equity loan carries a fixed interest rate and fixed period to repay the loan. This type of second mortgage gives you a lump sum of money that you pay interest on from day one. It may be a good choice for those who need to pay for one large expense, such as medical bills or credit card debt.

A HELOC is a variable-rate second mortgage that is a line of credit like a credit card. You can take out money up to your credit limit at any time, and you’re only charged interest on the amount you have taken out.

A HELOC may have a fixed rate initially, but is variable after the first several months or year. This loan is more volatile than a fixed rate home equity loan, so it may not be for you if you want a fixed, reliable payment. A HELOC’s rate can go up or down according to market trends. Find the best HELOC interest rates now.

Interest rates on home equity loans in 2024 are often in the 7-11% range, but your rate could be higher or lower, based on your credit score. Rates are higher than three years ago, but second mortgages are still one of the lowest rate options on the market. Find out what the HELOC costs are if you are considering a line of credit.

Equity on interest taken out with an equity loan may be tax deductible if used for home renovations. Under current tax law, you cannot take a tax deduction for the interest if the money is used for another purpose.

Home equity loans generally require a credit score of at least 620, but higher scores get better rates. .

The criteria for obtaining a home equity loan are often more stringent than those for a primary mortgage. This is because the first mortgage lender’s claims take priority over other liens if the loan goes into default. Many lenders require a minimum credit score of 620, though some have higher minimums. Some lenders may want to see at least a 640 or 680 credit score. If your credit score is not strong, your lender may require a high income or a low debt-to-income ratio.

Additionally, most lenders require at least 15% to 20% home equity to approve a home equity loan. If you are a new homeowner looking to upgrade your property or if your home’s value has dropped since you purchased it, you may not have enough equity to qualify.

The Home Equity Mart can connect you with multiple banks and lenders today if you want to get pre-qualified for a home equity loan.

Which Loan Is Best a HELOC or Personal Loan?

Before committing to a specific loan, it’s crucial to conduct some research, whether it’s for a personal loan or a home equity loan:

  • Determine exactly how amount you need to borrow.
  • Compile your current bills and debts.
  • Assess what monthly payment meets your budget goals.
  • Seek advice from a financial planner regarding your available options.

Consider the advantages of each type of loan option. Personal loans are unsecured and often come with minimal fees, rapid approvals, and immediate access to funds.

On the other hand, home equity loans are secured loans which allow lenders to offer lower interest rates, larger loan amounts, and potential tax advantages. However, it’s important to consult with a tax advisor to ascertain your eligibility for any deductions. These advantages are attainable because a home equity loan is secured by your home.

Home equity and personal loans are both viable options, depending on your goals and circumstances. An equity loan or HELOC may be a fit for a homeowner who wants to access low-interest equity to pay for important expenses, such as credit card debt or home improvements.

But taking out equity means another loan payment, and your house is at risk if you don’t pay.

A personal loan is unsecured and may have a higher rate and shorter payment term, but you don’t risk your property if you default. Still, a personal loan can be right for people with good credit because rates are in line with what second mortgages offer.

If you have questions, speak to one of our loan advisors today. We can help you get the money you need fast !

When you need to borrow money for home improvements, two options are a home equity loan and a personal loan. Both are installment loans with fixed interest rates, but their approval processes and repayment terms differ significantly.