If you are facing big expenses or big financial goals, you may look to your home’s equity as a solution. Tapping into your home’s equity comes with many benefits, including low financing rates and access to more cash than you are likely to get with an unsecured loan. On the other hand, using your home’s equity is a big decision, one that can be made easier with a greater understanding of how home equity loans and home equity lines of credit (HELOCs) work.
The Basics
These two home equity solutions both access your home’s equity, but are structured in different ways. A home equity loan provides a lump sum of cash with a fixed monthly payment. A HELOC is an open line of credit you can use just like a credit card on an as-needed basis. It typically comes with a “draw period” which is when you can use the funds, and a repayment period. With either home equity product, the credit limit and loan amount can include a percentage of the equity in your home, often from 80% to 100%. For example, at Meritrust, we offer home equity loans with loan values up to 95% of the current market value of your home.
Just like your original mortgage, these solutions use your home as collateral, to provide a lower interest rate than is available with unsecured personal loans, debt consolidation loans or credit cards.
How To Use Home Equity
If your financial goals involve large, one-time expenses, such as furniture or debt consolidation, getting a home equity loan may make the most sense for you since it gives you a lump sum of cash to cover up-front expenses and a predictable monthly payment. These loans usually come with lengthy repayment period, to give you low monthly payments.
On the other hand, if you have an ongoing financial need, such as a long-term home renovation or a wedding that involves lengthy planning and separate payments, accessing a flexible home equity line of credit may be your best option.
Interest Rates and Other Costs
Again, one of the most appealing features of home equity financing is that it offers great interest rates, expressed as an Annual Percentage Rate, or APR. The APR on a home equity loan includes points and other finance charges, while the APR for a home equity line of credit does not. The APR for a home equity loan is typically a fixed interest rate, although some lenders do offer them as variable-rate loans. The APR for a HELOC is typically variable but is sometimes available with a fixed rate, depending on the lender.
Because of the more complex process involved with accessing home equity, these financing options can come with closing costs. These costs can include loan points and fees for origination, title search, appraisal, credit checks, and other fees.
Compare both the interest rate and closing costs to see what options provide you with the best combination of value and service.
Tax Deductibility
If you use your home equity for certain expenses, such as home improvements, the interest you pay on your home equity loan or HELOC may be tax deductible (consult your tax advisor). In this instance, your home’s market value must be greater than the total debt on your home – including your first mortgage and home equity financing.
Other Considerations
As you weigh your options, be sure to evaluate the terms and monthly payments of each. Ask your lenders to explain all the details, such as any balloon payments, prepayment penalties, and credit insurance.
Seek Guidance
Because of the complex process involved, choosing the right lender is critical. Only work with lenders you know, ones you can obtain referrals or recommendations from, or your trusted financial institution. At Meritrust, our experienced home equity lenders can help guide you to the right home equity solution by walking you through all of your options and customizing your financing to fit your needs. Learn more about our home equity financing or call us at 800.342.9278 to speak to a friendly lender.
