WHAT IS A HOME EQUITY LOAN?
A home equity loan is an affordable way to pay for large expenses by using your home as collateral.
A home equity loan is basically a second mortgage on your home. You borrow a fixed amount of money and pay it back over the term, just like your original mortgage. It’s a secured loan for your personal use. That’s an affordable way to quickly get a lump sum of cash or credit for large expenses and still maintain a low monthly payment. It takes the home’s equity and allows you to borrow against it for a fixed term.
WHAT IS A HOME EQUITY LOAN USED FOR?
A home equity loan is used for any number of personal reasons that require a large lump sum. Using your 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, a wedding expense, or funeral expenses. In brief, it’s for any purpose where you’d need a significant amount of money.
WHAT IS EQUITY?
Equity is the percentage of ownership in an asset after subtracting any outstanding debts associated with that particular asset. Thus, your equity begins to build as you pay off the balance of your mortgage. So, as you continue to make payments on your original mortgage, the equity in your home should increase. Put simply, home equity is 90% of the appraised value of your home minus what you currently owe on the house.
HOW MUCH CAN I BORROW?
Money FCU can lend up to 90% of the appraised value of your home minus any outstanding balance on a first mortgage or home equity product. An easy way to calculate this is to take the appraised value of your home, multiply it by 90% (.90) then subtract your current mortgage balance and any other home equity loan balances. The resulting figure is the maximum dollar amount the Credit Union would be able to lend, if approved.
Appraised Value ($200,000) x 90% (.90) = $180,000 – Existing Mortgage Balance ($130,000) = $50,000
In the example above, you could borrow up to $50,000.
Money FCU has a loan calculator for your convenience.
IS THERE A DIFFERENCE BETWEEN A HOME EQUITY LOAN AND A HOME EQUITY LINE OF CREDIT?
Yes. In general, a home equity line of credit, known as a HELOC, is different in that it has a variable interest rate, which means that it will rise and fall with the market. The adjustable interest rate may start lower, but considering the length of the loan term, it can climb throughout the loan. Because of this, it generally seems to be a higher risk to the borrower. Additionally, you can draw money out as needed rather than one lump sum. This feature is useful when you have continuing expenses, such as the possibility of recurring hospital bills or multiple home improvements to complete over a few years. A home equity line of credit does offer a longer repayment period, though. 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.