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Understanding Home Equity Loans & Lines of Credit

Home Equity Loan vs. Interest Only Home Equity Line of Credit

With a Home Equity Loan or Line of Credit, you can access the equity in your home and use the money for renovations or repairs, to pay off high-rate credit cards, or for some other worthwhile purpose. While these loan types are extremely beneficial with big-ticket purchases, it is important to ensure you have the means to pay the loan back, as you are using your home as collateral.

Home Equity loans are often distributed with terms of 5, 10 or 15 years. Having a fixed-interest rate diminishes the need to worry about fluctuation, as you are guaranteed a consistent monthly payment. This loan type is often great when you are expecting a one-time expense. You have the ability to borrow only the amount that you need, avoiding the impulse to make more purchases with a remaining credit balance.

A Home Equity Line of Credit (HELOC) is typically a 20 year term loan, consisting of a 10 year draw period and a 10 year repayment period. After the 10 year draw period is up, you are no longer able to advance funds. There are different Home Equity Lines of Credit that are offered, including an Interest Only HELOC. An Interest Only HELOC usually has a variable interest rate, causing payments to potentially increase or decrease each month depending on the consistency of the interest rate. What differentiates this type of HELOC is that during the draw period of the loan, you are only required to make interest payments on the funds that were used. You are not obligated to make principal payments on your loan during this period; however making principal payments would decrease next month’s interest expense. After the draw period of the loan has expired, you will have to make both interest and principal payments on the funds that were used. Commonly, an Interest Only HELOC requires no minimum draw, truly allowing you to utilize it on an as need basis. Similar to a credit card, you can use this loan as a revolving line of credit. This type of loan would be ideal if you know you are going to experience recurring expenses, or come in handy for quick cash in case of an emergency.

Whether it’s a Home Equity Loan or Line of Credit, there are endless ways in which they can benefit you. While home improvements are a popular use, these loans could go towards funding a dream vacation, college expenses and so much more. If you are interested in either type of loan, please get in contact with a branch representative. Our knowledgeable staff will be happy to answer your questions and help you complete an application.

 

Terms to Know:

HELOC – Home Equity Line of Credit

APR – Annual Percentage Rate

LTV – Loan to Value; Expresses the ratio of a loan to the value of the real estate property

AVM – Automate Valuation Model; Service providing the estimate value of real estate property using mathematical modeling combined with a database. This is not an appraisal

Prime-Rate – The interest rate at which money can be borrowed, as published by the Wall Street Journal

Draw – Funds be taken from a loan

Appraisal – Assessing the value of a residence, completed by a licensed real estate appraiser

Lien – Right to keep possession of property belonging to another person until a debt owned by that person is fulfilled

Fixed Interest Rate – Interest rate on loan does not fluctuate

Variable Interest Rate – Interest rate on loan varies with the market

Interest Only Payments – Payments made only on the interest of funds that were used

Principal Payments – Payments made towards the balance owed