Unlocking Your Equity: Home Equity and HELOC Loans
One advantage of owning a home is building up equity over time. Even better is it increases without you doing anything apart from paying your monthly mortgage installments.
If you need to renovate the house, pay a debt, or maybe finance a purchase, you can use the equity to borrow funds either as a one-time home equity loan or a home equity line of credit (HELOC) loan.
Home equity is your home value less your mortgage and other loan balances. It increases as you pay off your loans and mortgage or when you add value to it, such as renovations and upgrades.
A home equity loan allows you to take a loan against your home equity. The loan comes as a lump sum and usually has a fixed interest rate.
The amount you can borrow against your home equity depends on the difference between how much your home could sell for currently in real estate and the amount you owe on your mortgage. Additionally, it’ll also depend on your loan-to-value ratio (LTV).
For instance, if your home’s current market value is $300,000 and you have a mortgage balance of $150,000, you can only borrow against $150,000, which is your home equity.
A home equity line of credit (HELOC) loan allows you to borrow against your home and draw the funds as you need them-more like credit cards. HELOCs have lower interest rates, but unlike home equity loans, they are variable.
You are allowed a draw period of up to 10 years followed by a repayment period of about 10-20 years when you repay the loan and cannot draw. HELOCs are great sources of emergency funds.
Both types of loans allow you to tap into your home’s equity. However, if you want to make a large purchase, refinance a loan, or even renovate your house, a home equity loan will be the best. But if you need revolving credit, go for a HELOC loan.
However, you should also consider the interest rates. Also, defaulting on payments can lead to disclosure. So, make sure you can afford the payments before unlocking your equity.