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April 25, 2024
Financial Freedom

Is a Home Equity Loan or Line of Credit the Right Move for You?

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If you are a homeowner, you are probably working to pay off a mortgage loan along with other typical expenses. These obligations can make saving for other needs, like major home renovations, college tuition, large medical bills or other high-cost, long-term expenses, more challenging. To provide extra funding for your household, you may want to consider a second mortgage using the equity you have built in your home.

Home equity is the difference between the value of your home and the amount you owe on your mortgage. A loan using this equity is known as a Home Equity Loan (HELOAN) or a Home Equity Line of Credit (HELOC)*. Both are attractive options primarily due to their lower interest rates and ease of availability, but like any other type of loan, they come with risks. If you are considering a HELOAN or a HELOC, below are a few basic facts to know.

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HELOAN versus HELOC

While both HELOANs and HELOCs allow you to borrow against the equity in your home, there are some distinct differences in these two types of credit:

HELOAN

  • Functions like an installment loan.
  • Borrowers receive a one-time, lump sum amount.
  • The interest rate is fixed and does not change over the life of the loan.
  • Interest is paid on the full amount of the HELOAN.
  • Monthly payments are predictable and made over a set period of time.

HELOC

  • Functions like a credit card.
  • Borrowers withdraw funds as needed up to the full amount of the line of credit.
  • The interest rate is usually a variable rate that can change (increase or decrease).
  • You can spend and repay the amount borrowed over the life of the line of credit.
  • You only pay interest on the amount of money you have withdrawn.

There may be closing costs and other fees associated with a HELOAN or HELOC. The amount borrowed depends on the value of your home, your income, credit history and ability to repay the debt.

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Custom loan fixed rate

What if you have already acquired a HELOC, used a portion of the funds and now want to create a plan to pay off that part of your line of credit? A good option could be a custom loan* that allows you to convert the used portion of the line of credit into a fixed-rate, fixed-term loan, while keeping your remaining, available funds in the line of credit free for future use. You can even have multiple custom loans within one HELOC plan.

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Risks

As with any debt, there are risks that should be considered. Interest rates on HELOCs can fluctuate, which is great when rates fall; however, when rates rise, your monthly payment can increase. Also, since your house is used as collateral to secure your loan or line of credit, failure to repay can put you at risk of losing your home.

When used wisely, a home equity loan or line of credit can be a great tool to help you reach your goals. Visit a branch or apply online today.

*Full disclosure provided at time of application.

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