Whether you are planning for a home remodel or a wedding, home equity loans and personal loans are two great options that can be used for financial support. Both of these loan choices offer varying benefits and risks, so it is important to weigh them carefully before deciding on which one is the right choice for you. Consider the following questions in order to decide between a home equity or a personal loan.
How much equity do you have in your home?
The first question to consider is whether you are capable of taking out a home equity loan. If you are not a homeowner or if you have not built up enough equity in your home, this type of loan is off the table. Many lenders require homeowners to have a maximum loan-to-value rate (LTV) of 80% in order to be approved for a home equity loan. In addition, lenders take into consideration financial information including tax assessments, mortgage statements, and a home value appraisal before approving a home equity loan.
How much do you need to take out?
The next step to consider is the size of the loan you need. Often, home equity loans require a minimum loan amount of $10,000. If you’re planning on doing large home renovations or have emergency medical expenses that exceed $10,000, a home equity loan is a great way to cover these costs. On the other hand, a personal loan is best used for smaller expenses, such as car repairs or a vacation. The amount you are capable of borrowing will depend on factors including your credit history and income.
How much do you want to pay on interest?
One difference between a home equity loan and a personal loan is the interest rate. A home equity loan is secured by your home, allowing interest rates to typically be lower than a personal loan. Because you are using your home as collateral, there is less risk involved for lenders, and in return, they are able to offer lower rates.
However, using your home as collateral presents a greater risk for homeowners. If your property value declines or you become unable to repay the loan, you put your home at risk. When deciding between a home equity loan and personal loan make sure to compare the rates offered to ensure you are receiving a rate that you will be able to safely repay.
What are you using it for?
Lastly, and one of the most important factors to consider, is what you are using the loan for. Both home equity loans and personal loans have places where they should be used and places where they should avoid being used. Home equity loans are best used for reinvesting into your property, such as through home renovations, and should avoid being used for expenses that do not offer a return on your investment. Learn more about the right places to use a home equity loan with this blog post. Personal loans can be used for a variety of reasons including paying for a wedding or consolidating debt, but borrowers should remain cautious about using a personal loan if they are already struggling to make payments on other debts.
In summary, there are both benefits and risks associated with using home equity loans and personal loans. Homeowners that have enough equity and are capable of making loan payments each month can reap the benefits of the lower interest rates associated with home equity loans. For borrowers that don’t want to use their home as collateral or do not need a large loan, a personal loan may be the smarter choice.
From now until March 31st, CTFCU is offering 10- year home equity loan with rates as low as 4.99%. Minimum loan amounts are $10,000 and the maximum LTV is 80%. Visit our promotions page and our personal loan page to learn more about these two options.