What is a home equity loan used for?
A home equity loan is an excellent way to use your collateral when you need a substantial amount of money. It takes the home’s equity and allows you to borrow against it for a fixed term.
You use a home equity loan for any number of personal reasons that require a large lump sum of money. Using the home’s equity is a great way to pay for larger home projects and still have an affordable monthly payment. Other reasons often involve debt consolidation, medical bills, college tuition, wedding expenses, or funeral expenses.
These loans are for any purpose where you need a more significant amount of money than you could get with a personal loan or credit card. They have a specified repayment period and a fixed monthly payment.
If you’re looking for a loan for home improvements, take a moment to read our blog on ways to save money; 7 Ways to Save on Home Renovations. Want to learn more about how a home equity loan works? Read, How Does a Home Equity Loan Work, by The Street.
What is equity?
Equity is the percentage of ownership in an asset after subtracting any outstanding debts associated with that particular asset. Your equity begins building as you pay off the balance of your mortgage to the lender. So, as you continue to make payments on your original mortgage, the equity in your home will increase. You acquire a greater percentage of control until it is finally yours, as the sole owner. Your home’s equity is the appraised value in your home minus what you currently owe on the house.
For example, if your home’s appraised value is $200,000.00, and you owe $130,000.00 on your existing mortgage, then the home’s equity is a value of $70,000.00.
Is there a difference between a home equity loan and a home equity line of credit (HELOC)?
Yes. A home equity line of credit, known as a HELOC, is different from a home equity loan in a few ways. First, it has a variable interest rate, which means that the interest rate will rise and fall with the market. An adjustable interest rate may start lower, but considering the loan term’s length, it can climb throughout its lifetime. However, it can also fall with the market, giving you a more favorable rate at times. Generally, it seems to be a higher risk to the borrower because of this, but you’re encouraged to weigh the risk.
Another difference is that the borrower may draw money out as needed on a HELOC rather than commit to one lump sum as a home equity loan demands. The HELOC funds are available for use throughout several years, allowing you to take out only what is needed as things arise. This useful feature comes into play when you have continuing expenses such as ongoing home projects or even recurring hospital bills for someone diagnosed with an illness, for example.
Lastly, a HELOC loan offers a longer repayment period. You’re able to use the line of credit for 10 years. After that, you have another 15 years to pay it back for a total of 25 years for the loan. An extended term means stretching out the debt for a more significant amount of time, leaving you with lower monthly payments than a home equity loan for the same amount.
||Line of Credit
||Fixed Rate 2.22%
||Variable Rate 4.50%
|Accessing the Funds
||Lump sum disbursement
||Withdraw funds as needed
||Monthly payments stay the same for the life of the loan
||Only pay on the balance you owe; can change with every advance
|Term of Loan
||Choose 5 or 10 year term
||Use the for 10 years, then take another 15 to pay it back