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Borrowing and Debt Reduction

Home Equity Lending & How it works

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What is home equity?

One of the most exciting things about owning a home is that your property has intrinsic value. As you pay off your mortgage and as the value of your home increases over time, your equity increases with it. Equity is the difference between how much your home is worth and how much you owe on your mortgage. Your house is an asset you can use to help finance big expenses that are important to you, especially ones that may add value to your home and further increase your equity in the long run. So, simply put, home equity lending means obtaining a loan secured using your home as collateral.1

 
Home equity lending options

Our main interest is helping you achieve your financial goals. We know that understanding the different ways to approach home lending can be confusing, but we’ll break it down into easy-to-digest points. Below, we’ll explain some of the differences between a home equity loan (HELOAN) and a home equity line of credit (HELOC), so you can decide how to finance your next big investment with the smartest funding for whatever your unique situation may be.

 

Common home equity uses

There are three main categories in which home equity financing makes sense:

  • Home renovations: They add value to your home and ultimately increase your equity.
  • Debt consolidation: Might be a smart move to make with your home equity, as the lower interest rates can lead to huge savings in the long run.
  • Emergencies like an unexpected expense or major illness: They can be overwhelmingly expensive and borrowing against your home equity can be a good way to cover those costs when your savings won’t.

 

There are other times when using home equity might make sense, depending on current interest rates. For example, a HELOAN or a HELOC might be cheaper than a student loan in the right market, and home equity might also be a good way to invest in growing your business.2 There’s no “right” way to take advantage of home equity, but we’ll detail the two most common options, so you can choose the smartest solution for you. 

 

What is a home equity loan (HELOAN)?

A HELOAN is a fixed-rate, lump-sum loan that’s a great tool for accessing equity in your home, especially if you know exactly how much you need. Your loan amount will be based on the difference between your home’s current value and your mortgage balance.2 Here are some of the distinguishing features of a HELOAN:

  • Fixed interest rate—however, the interest rates on HELOANs start a bit higher than HELOCs for this reason. But it’s still a lower interest rate than many other kinds of debt and you know that your monthly payment will never change.
  • Can be used to consolidate debt, finance home improvements, make a big purchase or even pay for college.2,3,4
  • Since you’re taking out a lump sum, you run the risk of losing money if property values in your neighborhood decrease.4

 

The bottom line? A HELOAN is a good bet for a big one-time purchase. Knowing that it will function as a second mortgage, you can calculate in advance precisely what you need for your renovation or purchase and determine whether or not the extra, fixed monthly amount works with your budget.

 

What is a home equity line of credit (HELOC)?

A HELOC provides more flexibility than a HELOAN, but can also include more variability that may—or may not—be right for your needs. A HELOC functions a bit like opening a credit card (hence, “line of credit”). You have a certain amount to spend, but you can withdraw your funds as needed and only pay interest on what you take out and spend.4 Here are some other features:

  • Variable interest rate. Bear in mind that interest rates for HELOCs can be substantially lower than for HELOANs, but they are variable so you won’t be able to predict a fixed monthly payment.
  • Provides the ability to draw on the line of credit as needed.

 

How are HELOANs and HELOCs similar?
  • You can use the money for anything you want, but your credit is secured by your home. So while the interest rates may be lower than a credit card, if you default, your lender could potentially foreclose on your home.4
  • The application process is similar to the mortgage application process and will be based on similar factors: equity, income, credit score, payment history, debts, etc.
  • May be tax-deductible if used to “buy, build or substantially improve the taxpayer’s home,” according to the IRS.3

 

Which home equity lending option is right for you?

The right home equity solution truly depends on your individual needs and financial situation. We can help you navigate the details and decide which option is the best fit for you.

 

HOME EQUITY LOAN:
  • Fixed rate
  • Lump sum for a defined amount
  • Consistent payments
  • Can experience greater impact from fluctuations in home valuations
HOME EQUITY LINE OF CREDIT:
  • Pay only on what you draw
  • Flexibility for making interest-only payments during the draw period
  • Variable interest rates mean costs could increase based on the market

 

Don’t forget: Our loan advisors are always available to walk you through your options and guide you to the choice that makes the most financial sense. Our interest, as always, is you.

 

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1Fontinelle, Amy. “Home Equity Loan vs. HELOC: What’s the Difference?” Investopedia. June 6, 2021.

 https://www.investopedia.com/mortgage/heloc/home-equity-vs-heloc/

 

2Costagliola, Diane. “7 Reasons to Use Home Equity.” Bankrate. June 28, 2021. https://www.bankrate.com/home-equity/reasons-to-use-home-equity/

 

3Kagan, Julia.”Home Equity Loan.” Investopedia. October 11, 2020. https://www.investopedia.com/terms/h/homeequityloan.asp

 

4Lewis, Holden. “HELOC vs. Home Equity Loan: Pros and Cons.” Nerdwallet. May 15, 2020.

https://www.nerdwallet.com/article/mortgages/home-equity-loan-line-credit-pros-cons