Kyle and Jenn purchased a historic home in the northeast. Owning a historic home can be a bit like the opening line of “A Tale of Two Cities”. If you don’t get the reference, you can hit Google after we are done. But Kyle and Jenn realized after living there a couple of years that if this house needed some repairs and modifications to make it livable for their growing family long-term.
They were considering tapping their considerable home equity through a loan to the modifications, and wanted to know which was better, a home equity loan, or a home equity line of credit, or HELOC.
While each situation is different, including yours, it generally comes down to a matter of cost versus flexibility. Home equity loans have a more rigid structure: You take out a loan for a specific amount and pay it back over a specific time frame, with a declared interest rate and monthly payment.
With a HELOC, you have an amount you CAN borrow, but don’t start paying interest until you draw on the line of credit. Paying the line of credit down is also flexible, subject to certain minimums.
You do, however, pay a price for this flexibility. The interest rates for HELOCs tend to be higher and can fluctuate up or down based upon prevailing interest rates.
Ultimately, Kyle and Jenn proceeded with a HELOC. Is this right for you? Well, I don’t know.
But what I can tell you is Kyle and Jenn’s decision, much like the decisions that you will face, is a perfect illustration of a quote by the great Thomas Sowell, “There are no solutions, only tradeoffs.”
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/ SIPC.
This is a hypothetical situation based on real life examples. Names and circumstances have been changed. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your advisor prior to investing.