Home Equity Loans

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A home equity loan or a home equity line of credit/HELOC (they are not the same-see below) is another term for a second mortgage loan that uses your home as collateral for the loan. Your first mortgage or deed of trust is the one you used to purchase your home (although you may have refinanced it).  Once you amass sufficient home equity you can place an additional loan (2nd mortgage) against the property. Home equity is the difference between what your home is worth and what you owe on your home.  You build equity through a combination of paying down your first mortgage balance and increases in the value of your home.

Home equity loans offer access to large amounts of money, at lower interest rates, for longer terms and are often easier to qualify for than other types of loans.

You've heard these terms tossed around and used interchangeably, but they're not the same. 

A home equity loan will provide you with a large lump sum of cash to be repaid over time with fixed monthly payments. Your interest rate is set when you borrow and will usually remain fixed for the life of the loan.  These loans are best suited to large one-time expenses such as home improvements, weddings, business start-up and debt consolidation. 

A home equity line of credit (HELOC) functions very much like a credit card. You are approved for a maximum loan amount (credit limit) and you can borrow as much (up to the credit limit) or as little as you need. You can then repay the borrowed amount and borrow it again without re-applying for a loan.  HELOCs are a great cash management tool for things like college tuition, seasonal expenes, business cash flow, etc.

A HELOC can be a more flexible option because you always have control over your loan amount—and, by extension, your interest costs. You'll only pay interest on the amount you actually use for the amount of time you actually use it.

•       Competitive rates and terms for major life events:
  • Education expenses
  • Weddings
  • Home remodel projects
  • Debt consolidation
  • And much more
•       Your home is used as collateral. 
•       Loan amount determined by available equity
  
•       Available for primary residences only
•       Convenient terms tailored to fit your budget
•       Quick, local decision-making and processing
•       Attentive, friendly service from start to finish

There are pros and cons of taking out a home equity loan. Perhaps the greatest advantage is a fixed interest rate. Additionally, monthly payments and terms never change.

•       Revolving loan for ongoing or seasonal needs:
  • Education expenses
  • Home improvements
  •  Debt consolidation
  •  Emergency reserve
  • And much more
•       Your home is used as collateral
•       Loan amount dtermined by available equity
•       Available for primary residences only
•       Convenient terms tailored to fit your budget
•       Funds available anytime without reapplying; apply once, then use repeatedly thereafter
•       Revolving credit – as principal is repaid, more becomes available for use
•       Easy access to funds via check or online banking
•       Quick, local decision-making and processing
•       Attentive, friendly service from start to finish

It’s important to weigh the pros and cons of home equity lines of credit. One of the primary advantages is you pay interest only on the amount you use, not the total amount. You also get increased flexibility with interest-only payments during the draw period.

On the other hand, higher interest rates may increase your overall payment. In addition, it’s easy to overspend with a HELOC. If you don’t use it wisely, you may find yourself left with a large balance. 

Your home equity can also be used for debt consolidation. 

Using your home equity to consolidate debt can offer several advantages.

1. One Payment 

If you’re trying to manage car loans, a personal loan, medical bills, and credit cards, you understand how challenging it can be to keep track of payment dates. 

By consolidating your debt, you can combine all bills into one single payment plan every month, simplifying your due dates and reducing the chance of missed payments.

2. Know when your balances will be paid in full

If you don’t keep using your cards, using a home equity loan or HELOC to consolidate debt simplifies the process of paying off credit accounts. With a home equity loan, you’ll have fixed repayment terms and know the exact date when the loan will be repaid.

3. Lower Overall Interest Rates

Due to the fact that the debt is secured against your property, home equity loans and HELOCs have lower interest rates than most major credit cards. 

The average variable credit card interest rate is anywhere between 15%-20%. 

Meanwhile, the average rate of a HELOC  is anywhere between 3%-10%. A home equity loan offers even lower rates and enables you to lock in a fixed interest rate, unlike a credit card that can increase at any point in time. 

Lastly, with a home equity loan, the majority of your monthly payment goes toward the principal, not just the interest.

4. Save Money

The ability to lock in a lower fixed rate not only saves money in the long term but also enables a lower monthly payment and can help you pay down the debt faster. 

For example, if you had $10,000 in credit card debt at a 16 percent interest rate, you’d pay $243 per month and more than $4,591 in interest by the time you pay it off. 

Consolidating that debt with a five-year home equity loan would not only allow you to pay off the debt faster but also reduce your monthly payments to $193 and save $3,391 in interest.

Whether you take out a lump sum up front for a large purchase, or make multiple purchases over time with a line of credit, home equity loans and HELOCs can be utilized to streamline your personal finances.  

If you have multiple credit accounts and are looking for a manageable approach to group them together for an easy one payment per month, consolidation may be the best solution for you. 

Let the team at Advantage Financial Federal Credit Union walk you through all the details. With a relaxed approach and excellent educational guidance, you will learn how to use home equity loans and/or home equity lines of credit to achieve your financial goals.