One of the benefits of homeownership is equity. A Home Equity Line of Credit (HELOC) or a Home Equity Loan (also know as a second mortgage) allows a homeowner to borrow money using the home’s equity as collateral.
These loans can be a solution for tackling home repairs and renovations, which protect your investment and can improve your property’s value. They may also be used to cover emergencies or pay college tuition. Because your home is the collateral, the interest rates are often lower than other loans. The interest you pay may also be tax deductible, but you will need to consult your professional tax advisor.
While HELOCs and Home Equity Loans are typically used for the same purposes, there are key differences. Here’s what you need to know:
What is Equity?
Equity is the value of your ownership in the property and is calculated by subtracting your mortgage balance from your home’s current market value. If your home is worth $400,000 and your loan balance is $300,000, you have $100,000 in equity. Your equity increases as you pay down your home loan, and as the home’s value increases. For example, in one year your home’s value increases to $410,000, and you’ve paid your loan principal down to $290,000. Your equity is now $120,000.
For the purposes of a HELOC or Home Equity Loan, the amount of equity you are able to tap into will be subject to review and credit approval.
How is Value Determined?
A Real Estate Appraiser provides the official valuation.
What’s a Home Equity Line of Credit (HELOC)?
A HELOC is a revolving line of credit, similar to a credit card or a traditional line of credit — you’re approved with a limit, and you have the flexibility to borrow funds as needed. A HELOC typically has a draw period, which is the time frame during which you can borrow funds. The draw period varies by lender, but is most commonly 10 years. The lender may also provide checks or a special debit card to access the funds. During this time, you can make minimum monthly payments or pay the balance in full. The draw period is followed by a repayment period, in which no further draws can be taken and the entire balance is paid in full with monthly payments. Generally, the interest rate for a HELOC is variable, which means it can fluctuate depending on economic conditions.
What’s a Home Equity Loan?
A Home Equity Loan is a closed-end loan — a lump sum repaid with interest over a specified term. Interest rates may be fixed or adjustable, depending on the lender. An adjustable-rate may have a period of fixed interest, after which the interest and payment adjusts at specific intervals based on an economic index.
Interested in tapping into your equity, or just starting out on the home buying journey? Contact a SESLOC Mortgage Loan Officer today to request a free consultation to review your options, or get started with an application.