3 Considerations When Deciding Between a HELOC, Home Equity Loan, or Equity Sharing Agreement
If you're a homeowner considering tapping into the equity in your home, you have 3 main options: a home equity line of credit (HELOC), home equity loan, or equity sharing agreement. Here are a few key considerations to keep in mind when determining which option is right for you.
1. How much money do you need?
This is the first and arguably most important question to answer when deciding between a HELOC, home equity loan, or equity sharing agreement. A HELOC typically allows you to borrow up to 85% of the equity in your home, while a home equity loan usually has a maximum loan amount of 80%. An equity sharing agreement, on the other hand, does not involve borrowing any money and instead allows you to sell a portion of your home's equity to an investor in exchange for a lump sum of cash.
2. What are the repayment terms?
Another important consideration is the repayment terms of the loan. A HELOC typically has a 10-year draw period during which you can borrow money as you need it, followed by a repayment period during which you must pay back the loan plus interest. A home equity loan, on the other hand, typically requires that you repay the loan in full within 5-15 years. And with an equity sharing agreement, you will typically make monthly payments to the investor for a set period of time, after which the agreement will be dissolved and you will once again own your home outright.
3. What are the risks and rewards?
As with any financial decision, it's important to weigh the risks and rewards of each option before deciding which is right for you. With a HELOC, the biggest risk is that your home could be foreclosed on if you default on the loan. With a home equity loan, the biggest risk is that you could end up owing more money than your home is worth if the value of your home decreases. And with an equity sharing agreement, the biggest risk is that you could end up losing a portion of your equity if the value of your home decreases.
At the end of the day, the best option for you will depend on your individual financial situation. Be sure to speak with a financial advisor to get more personalized advice before making any decisions.