Home Equity vs Home Equity Line of Credit: Which is Right for You?
There are a quite a few home loan options in general when it comes to borrowing money. However, for already established homeowners there are the additional options of home equity loans or home equity lines of credit which can help you to tap into your home’s equity to access extra funds for many purposes.
First, what is home equity?
Equity is the current market value of a mortgaged property after the deduction of charges against it. So in short, the value of your home minus your mortgage will give you the amount of equity in your home. The value of equity can change over time as a mortgage is paid down or housing markets fluctuate and affect property values.
For example, your home is worth $300,000, and you have a mortgage that you owe $150,000 on. If you divide 150,000 by 300,000 you get 0.50, which means you have a 50% loan-to-value ratio. A lender that allows a combined loan-to-value ratio of 80% would grant you a 30% home equity loan or line of credit, for $90,000.
Depending on your financial record, lenders may let you borrow a percentage of your home equity. With North Brookfield Savings Bank you may be able to borrow up to 80% of your home’s appraised value, with either of our Equity Loan products.
About Home Equity Loans
Home equity loans are essentially a second mortgage on your home, and it works like a conventional fixed-rate mortgage. The equity loans pay out in a one-time lump-sum and are good for large home projects or one-time expenses. Think, large renovations or upgrades, adding a deck, pool, or addition to your home or consolidating debt.
They typically have a fixed interest rate, resulting in payments that will always be the same every month, making it easier to factor into a budget. It is also important to note that this payment will be in addition to your regular mortgage payments.
NBSB offers 4 fixed-rate Home Equity Loans with 5, 10, 15, and 20 year terms.
About Home Equity Lines of Credit (HELOC)
Home Equity Lines of Credit or HELOCs are similar to a home equity loan in that you are borrowing against the value of your home. Where they differ is that a HELOC is more similar to a credit card. You have a credit limit which is a certain amount of money available that you can borrow and pay back. You can borrow what you need as you need it and only pay interest on the amount you draw. Typically, HELOCs are good for when you need flexibility to access cash for ongoing expenses such as educational expenses, travel or event expenses, or ongoing home improvement projects.
HELOCs often begin with a lower interest rate than home equity loans but the rate is variable which means it can rise or fall along with market trends. Ultimately meaning your payments can differ month-to-month.
HELOCs typically have a draw period, or a period of time in which you can access the money. That’s followed by a repayment period where borrowing must cease and monthly principal and interest payments are required.
NBSB offers two 20-year Home Equity Line of Credit loan options where, for example, you would be able to borrow against the equity in your home for up to 10 years before repaying all the money you owe, plus interest and fees, for the final 10 years of the loan. Even though the initial period of your HELOC is called the draw period, you’ll still be required to make minimum monthly payments during that time. A minimum monthly payment during the draw period is very commonly based solely on interest due. Also, with HELOCs even though a borrower is only billed interest during the draw period on funds used, they can pay back towards the principal and the funds are available for them to re-use again in the future.
Now, a recap:
In the end both home equity products are great options and the decision will ultimately depend on your specific needs.
- Home Equity Loans offer funds in a lump-sum that you pay back in equal payments for the term of the loan. Typically best for large projects and expected one-time expenses.
- Home Equity Lines of Credit offer funds up to a limit, on an as needed basis for a portion of the term of the loan. Typically best for smaller projects and the occasional unexpected expense.
Keep in mind that you are using your home as collateral, so the lender can foreclose on your property if you default on your payments.
As always, if you have any questions, or would like to go over what options are available to you, you can contact a North Brookfield Savings Bank Mortgage Lender for assistance, or you can Apply Online when it is convenient for you. To learn more about North Brookfield Savings Bank’s equity loan or equity line of credit rates offered currently you can view our mortgage rates.
We’re here to help.