Home equity loans and HELOCs allow homeowners to borrow against that additional value, often at an interest rate lower than a personal loan and credit card.
The home equity loan
A home equity loan provides a one-time, lump-sum disbursement to
qualified borrowers. How much you can borrow depends on your loan-to-value (LTV) ratio. LTV is how much you owe on your home divided by its appraised value. For example, if you owe $300,000 on a home worth $750,000, your LTV is 40 percent.
Some lenders may cap the dollar amount that can be borrowed. At 1st United, you can borrow up to 80% of your home’s value, less your first mortgage balance. With the previous example, you could potentially be approved for a $300,000 home equity
loan.
The interest rate on a home equity loan is fixed and static monthly payments lasting 10-20 years usually start soon after you receive the funds. Interest might also be tax deductible. This depends on how you use the money, your income, and how much you owe on the property so consult a tax professional to find out if you qualify.
Also, keep in mind that because a home equity loan is borrowed against the value of your home, failure to repay can result in foreclosure on
your property.
Every situation differs, but typically a home equity loan can be a strong solution for a large, one-time expense. It’s often used for:
- Debt consolidation (such as combining multiple credit card balances into one low payment)
- Large home projects (e.g., a new garage, windows, roof replacement, a swimming pool)
- Wedding expenses
- Medical bills
- Down payment on another property
The HELOC
Unlike a home equity loan that provides a one-time lump sum of cash, a HELOC allows you to draw funds from your equity, up to a set amount, whenever you need them. Money can be transferred to your checking account or directly to a business for payment. A HELOC will have a set time frame for which you can withdraw funds (usually up to 10 years).
A HELOC’s interest rate tends to be
lower initially than that of a home equity loan, but the rate is variable, so it will go up and down based on the Prime rate.
Similar to a home equity loan, a HELOC’s interest may be tax deductible depending on how you use the money – talk with a tax advisor for more information. Eighty percent of your LTV provides a general borrowing guideline and failure to repay can result in foreclosure.
The flexibility of a HELOC is what makes this option appealing. But take care not to
treat it like an endless ATM because you will be repaying it later, possibly at a higher interest rate than today. Typical HELOC uses include:
- Ongoing home improvement needs (e.g., fixer-uppers, extensive remodeling, ongoing redecorating)
- Tuition payments
- Recurring medical expenses
- Emergency long-term expenses (that your
emergency fund can’t cover)
Make the most of your equity
Whether you see Bay Area housing values as beneficial
or out of control, they have helped homeowners rapidly build equity. At the same time, interest rates are currently low and likely will remain low for a while. This combination makes now a great time to take advantage of the equity you may
have in your home, either with a loan or a HELOC.
Tapping into your equity often makes better financial sense than charging large or recurring purchases to a credit card, taking out a personal loan, or dipping into your retirement savings (and possibly incurring penalties for doing so). That said, the decision to seek a home equity loan or a HELOC must be made carefully. You’re adding debt, so be sure it makes sense and fits into your short- and long-term budget plans.
If you have questions about home equity loans and lines of credit, help is a phone call away. Our real estate specialists are happy to help.
Home equity installment loans and home equity lines of credit (HELOCs) can be great options for borrowing. With a home equity installment loan, funds are received in a lump sum and paid back over a set period of time. A HELOC, on the other hand, lets you borrow money as you need it and in the amount you need up to a pre-determined limit. In addition, with HELOCs, there’s more flexibility in how much, and how fast, you pay off the balance.
Uses for a home equity loan vs. a home equity line of credit
A home equity installment loan is ideal if you want a large lump sum of cash for a one-time expense, such as a kitchen remodel, or if you want to consolidate debt. A home equity line of credit may be perfect if your expenses will be staggered over a period of time, such as your child’s college tuition or a larger-scale home improvement project that will take several months or years. HELOCs also are useful to have available in case of home repair, medical expenses or some other unexpected event.
Terms for a home equity loan vs. a home equity line of credit
Home equity financing is a low-cost option because there are no closing costs for installment loans or lines of credit. Rates for an installment loan may be marginally higher than for a credit line but the term also is usually longer, so your monthly payments may be similar for both. A HELOC has a variable interest rate based on the Wall Street Journal Prime Rate as published in the Money Rates section. One benefit of a HELOC is that you are only charged interest on the amounts withdrawn against the credit line.
Another HELOC feature to consider
You can lock in your interest rate on balances or new draws with the Fixed Rate Option. When you lock a rate, you’ll have peace of mind knowing the rate will not increase.