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Your Guide to Home Equity Vs HELOC

Family outside of a house.

Knowing the Difference Can Make Your Big Dreams an Affordable Reality

When it comes to debt or large expenses, there are a lot of options. If you own your home, you may be able to utilize a low-interest Home Equity Loan or a Home Equity Line of Credit (HELOC). These can be better alternatives to high-interest credit cards or other loans as the rates are often lower and terms more flexible. Today we’re going to cover each type of loan, including their risks and benefits.

What is Equity and How is it Calculated?

Home equity is the value of your home minus what you owe on your mortgage. Your equity increases as you pay down your mortgage and as the value of your home increases.

To calculate your equity, you need to discover your home’s current market value and subtract how much you still owe on your mortgage. For example, if your home’s current value is $450,000, and you still owe $250,000 on your mortgage, you have $200,000 in equity.

Few lenders will allow you to borrow your home’s full equity value. Instead, they will likely allow you to borrow between 75-90 percent (loan-to-value ratio) of your equity. The ratio you receive on your loan is determined by the lender’s policies, how much you owe on your mortgage, your credit score, and your current income.

Based on $200,000 in equity with an 80 percent loan-to-value ratio, you could qualify for a $110,000 home equity loan. Use the Rivermark Home Equity Line of Credit calculator to determine how much you could borrow.

Home Equity Loan vs HELOC

For most people, home equity is a large portion of their financial worth. It’s no surprise that many people utilize equity through either a HELOC or a Home Equity Loan.

Home Equity Loan
Home Equity Loans are sometimes called a second mortgage. If you decide to do a Home Equity Loan, you will have two monthly payments, your actual mortgage and then the equity loan payment. Some lenders will combine the two into one monthly payment to make your life easier.

PROS

  • Fixed interest rates
  • Lower interest rates than personal loans or credit cards
  • Stability with fixed monthly payments
  • Provided in one lump sum
  • Use the money for anything
  • Some lenders offer lower fees and costs

CONS

  • Your home is at risk because it is used as collateral for the loan
  • Higher interest rates than HELOCs
  • Most lenders charge closing costs and fees

All of the familiar things affect your potential interest rate on your loan such as your credit score, your home’s market value, and your income.

Home Equity Line of Credit
Instead of a lump sum of cash, a HELOC is more like your own personal credit card. Your lender will provide you with a max line of credit that’s available for you to withdraw money as you need it during your ‘draw period’. This usually ranges between 5 to 10-years.

PROS

  • Lower interest rates than home equity loans
  • Flexibility in how much you borrow and when you borrow
  • Interest doesn’t accrue until you draw the money
  • Faster approval process

CONS

  • Variable interest rates
  • Payments can vary month to month due to the variable interest rate
  • Easy access to funds can make it easier to spend more than you need
  • Requires an initial advance when loan begins
  • Minimum withdrawals when you dip into the line of credit

Most lenders allow flexibility in your draw and payment periods. Since it is a line of credit, many lenders let you to pay the principal before the draw period ends, which can save you money on interest charges.

Best Uses for a Home Equity Loan

When you need money for a large purchase or other one-time expense, using Home Equity can be a great option. Best uses for a Home Equity Loan or a HELOC include:

  • Invest in low-cost home improvements by updating but not fully remodeling your bathroom or kitchen
  • Replace old garage doors or front doors with new ones
  • Invest in your curb appeal to increase your home’s resale value and increase equity
  • Debt consolidation can help you put your debt into one loan and reduce your overall interest rate
  • College tuition and other education expenses

Most people who decide to leverage their equity use it to build equity through much-needed home updates. However, you will want to minimize the amount of loan you take out by pinpointing low-cost updates instead of full remodels.

Be Aware

When inquiring with different lenders, it is wise to compare the costs of home equity loans. Some lenders charge prepayment penalties or cancellation fees on HELOCs. Others will charge an annual fee and/or an inactivity fee if you do not use your line of credit.

Home equity loans can come with closing costs and fees that range from 2% to 5% of the loan amount. If you take a loan of $110,000, you could pay up to $5,000 in costs and fees! It’s best to talk to your lender and read the fine print. At Rivermark, we offer equity options with no annual fees and no prepayment penalties.

Take the Next Step

Some life situations can put a strain on your budget, but the equity you’ve built in your home can be used to provide much-needed flexibility that credit cards and other loans cannot. The Rivermark home loan team will work with you to find the best options available for your situation. Check out our Home Equity Loan and Home Equity Line of Credit (HELOC) options, stop by any branch, or give us a call at 503.626.6600 or 800.452.8502.