Contrasting Home Equity Loans vs. Equity Sharing Agreements vs. HELOCs
3 things to consider before getting a home equity loan, HELOC, or equity sharing agreement
If you're a homeowner, you may be considering tapping into your home equity to finance a major expense. But before you do, it's important to understand the different types of home equity products and which one is best for your needs.
home equity loan vs. equity sharing agreement vs. getting a home equity line of credit
When it comes to financing a home improvement project or consolidating debt, homeowners have three main options: a home equity loan, an equity sharing agreement, or a home equity line of credit (HELOC). Here's a look at the key differences between each option:
Home Equity Loan
With a home equity loan, you borrow a lump sum of money and repay it over a fixed period of time, usually 5-15 years. Home equity loans typically have a fixed interest rate, so your monthly payments will stay the same throughout the life of the loan.
Equity Sharing Agreement
An equity sharing agreement is a type of joint ownership arrangement in which two parties agree to share the equity in a property. With an equity sharing agreement, you can tap into your home equity without taking on debt.
Home Equity Line of Credit (HELOC)
A home equity line of credit is a revolving line of credit that you can tap into as needed. HELOCs typically have variable interest rates, so your monthly payments can go up or down depending on market conditions.
Before you decide which option is right for you, it's important to understand the pros and cons of each.
Home Equity Loan Pros:
• Home equity loans can be used for a variety of purposes, including home improvement projects, debt consolidation, and major purchases.
• Home equity loans typically have lower interest rates than credit cards or personal loans.
• Home equity loans offer the security of fixed monthly payments.
Home Equity Loan Cons:
• Home equity loans require you to borrow a lump sum of money all at once, which may not be ideal if you only need to finance a small expense.
• Home equity loans have shorter repayment terms than equity sharing agreements, so you'll need to make higher monthly payments.
• Home equity loans put your home at risk if you default on the loan.
Equity Sharing Agreement Pros:
• Equity sharing agreements can be a good option if you only need to tap into a portion of your home equity.
• Equity sharing agreements typically have longer repayment terms than home equity loans, so your monthly payments will be lower.
• Equity sharing agreements do not put your home at risk if you default on the agreement.
Equity Sharing Agreement Cons:
• Equity sharing agreements can be complex, so it's important to have a lawyer review the agreement before you sign.
• Equity sharing agreements may not be available in all markets.
• Equity sharing agreements typically have higher interest rates than home equity loans.
Home Equity Line of Credit Pros:
• Home equity lines of credit can be a good option if you need flexibility in how you access your home equity.
• Home equity lines of credit typically have lower interest rates than credit cards or personal loans.
• Home equity lines of credit offer the flexibility to make interest-only payments during the draw period.
Home Equity Line of Credit Cons:
• Home equity lines of credit have variable interest rates, so your monthly payments could go up or down over time.
• Home equity lines of credit typically have shorter repayment terms than home equity loans, so you'll need to make higher monthly payments.
• Home equity lines of credit put your home at risk if you default on the line of credit.
Before you decide which option is right for you, it's important to compare the pros and cons of each. You should also speak with a financial advisor to learn more about the risks and benefits of each option.
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