As you live in your home, it builds equity. Home equity is basically the portion of your home that you truly own (the home’s market value minus any outstanding loan balance). As you pay off your loan, your equity builds. When you’ve established enough equity, you may borrow against it in the form of Home Equity Loans or Lines of Credit. We’ll explain what both are, what makes them different, and what they’re commonly used for.
What is a Home Equity Loan?
A Home Equity Loan is a product that allows you to borrow a fixed amount of money, which you receive all at once. The loan is secured by the equity in your home. A Home Equity Loan may be classified as either a Fixed Home Equity Loan or a 5/1 Adjustable-Rate Mortgage (ARM). The rates and payments differ for both, but we’ll cover that below. The rate and amount you can qualify for is based on your credit score, term, and Loan-to-Value ratio.
What is a Home Equity Line of Credit?
A Home Equity Line of Credit (HELOC) is a product that allows you to borrow money over a period of time as you need it, using your home equity as collateral. It allows you to borrow as much as you want, up to your credit limit. Like a credit card, your credit revolves, meaning you could borrow $6,000 of your $10,000 limit, pay back $3,000, and then have $7,000 of remaining credit. Your credit limit and initial rate are based on your credit score, term, and Loan-to-Value.
What Are the Differences Between Home Equity Loans & HELOCs?
The differences between the two are in the interest rates and payments.
INTEREST RATES: Home Equity Loans may have a fixed or variable rate. A fixed Home Equity Loan has a fixed rate, so the payment is the same every month. HELOCs have a variable interest rate. That means the rate may change throughout the course of your repayment. HELOC rates may change every April and October. A 5/1 ARM is a hybrid between the fixed and the variable rate depending on the phase or time period of the loan. That means the 5/1 ARM payment is fixed for the first five years and then variable thereafter.
PAYMENTS: Home Equity Loan payments may be fixed or adjustable, and consist of principal and interest. You also have the option to pay more than what’s required in order to pay off your loan early. HELOC payments are different. Since the rate is variable, the payment is subject to change. And with a HELOC, in addition to paying principal, you only pay interest on the balance you owe. There is also an interest-only option with HELOCs. Find out when an Interest-Only HELOC is your best option.
|Home Equity Loan||HELOC|
|Fixed Interest Rate||X|
|Variable Interest Rate||X||X|
|Withdraw Money as You Need It||X|
|Receive All the Money at Once||X|
|Pay Interest Only on the Amount You Advance||X|
|Interest-Only Payment Option||X|
What Are Home Equity Products Commonly Used For?
The great thing about home equity products is that they’re so versatile. They can be used for nearly anything. These are three of the most common reasons Connexus members get Home Equity Loans and Lines of Credit:
- Debt consolidation
- Home improvement projects
- Other large purchases
How Do I Find Out Which is Best for Me?
This is where our experts come in. Our team can look at your needs and your financial situation to recommend the best product for you.