In a tight housing market, homeowners looking for more space or finer features are feeling a bit stuck. As a result, many are finding ways to upgrade by tapping into the equity they hold in their home. The money you can access with a home equity line of credit, or HELOC, can be used for anything you want: a vacation, a wedding, college tuition, or surprise expenses. Evergreen Credit Union is a trusted local lender for any homeowner looking for ways to finance their renovations and grow their love for their home. These are the basics for understanding HELOCs and home equity loans. Write down your questions and contact a lender like Evergreen to see how they can help you create your dream home.
What is equity and how can I unlock it?
Equity is the difference between the value of your home, according to a current appraisal, and the remaining balance on your mortgage. As you pay off your mortgage, the equity in your home increases.
A traditional home equity loan gives the borrower an upfront lump sum in exchange for fixed monthly repayments over the term of the loan. This is also known as a second mortgage. Lenders often allow you to borrow against a substantial percentage of your home when using this product. A home equity line of credit or HELOC approves the borrower for an aggregate credit limit that they can withdraw as needed, instead of receiving a lump sum.
In both scenarios, the loan has term limits and the borrower uses their home as collateral, so the lender can take possession of the home if too many payments are missed.
Differences Between HELOC and Home Equity Loans
A major difference between a HELOC and a home equity loan is the predictability of payment amounts. HELOCs typically have a variable interest rate, so your monthly payment may fluctuate. A home equity loan usually has a fixed rate, which results in consistent monthly payments.
Once approved for a HELOC, the borrower has a draw period, a fixed time they can withdraw from the line of credit. When that time is up, the repayment phase begins, with payment amounts based on the amount you advanced, not the full credit limit you were approved for. Borrowers should be prepared for their monthly expenses to increase as they begin to repay principal.
To borrow or not to borrow
One final tip: Just because you can borrow from your home doesn’t mean you should. Owning a home in a robust Maine market is a plus, so recognize when you borrow against that value that you’re increasing your debt-to-equity ratio and potentially reducing your net worth. On the other hand, borrowed funds used to improve your home should increase its value, making your home loan a smart investment that pays you back when and if you sell the property.
Is a HELOC loan right for you? Everyone’s finances are unique. Find out more details by visiting egcu.org/equity or contact Evergreen Credit Union at 207-221-5000 and ask to speak with a home equity loan specialist.