Understanding Home Equity Loans and Home Equity Lines of Credit

Your home can be a great source of cash. The equity in your home—the difference between what you owe and the market value—can be used to beautify your backyard, add an accessory dwelling unit (ADU) or clean up your kitchen. With home values on the rise, your home can hold a hidden source of funds. Here’s a quick example on how to calculate your equity:

Home Value: $950,000
Current Mortgage Balance: - $500,000

Equity: $450,000

There are two common ways to tap into the equity in your home – home equity loans and home equity lines of credit (HELOC). 

Home Equity Loan

A home equity loan is a great choice for a single purpose. Uses include things like replacing an air conditioning system, painting projects, or even consolidating higher rate debt. Funds are received as a lump sum and the rate and monthly payment remain constant for the entire term of the loan. Typically, terms range from 5 to 15 years, which allows for affordable payments and predictable budgeting.

HELOC

A HELOC is a great choice for large, ongoing projects which are spread over time. Uses include things like a home addition with multiple contractors, a kitchen remodel with multiple expenses, or even education expenses that get paid over time. A HELOC is more like a credit card with a revolving line of credit. You can draw from it as needed, and as you pay it off, the balance becomes available to reuse.

Unlike a home equity loan with a fixed rate and term, a HELOC is usually a variable rate loan that can go up or down monthly. In addition, HELOC’s typically offer interest-only payments which makes repayment during the draw period very affordable. The minimum monthly payment will vary based on the balance, monthly interest rate and whether you choose to pay interest only or make payments to the principal balance.

The draw period is the amount of time that you can use the revolving funds. Common draw periods are 10 years. The repayment period follows the draw period, whatever balance is remaining becomes due and payable – usually amortized over 15 years to keep payments manageable.

Choosing the right loan depends on your financial needs, your approach to repayment and how you plan to use the funds. Our real estate experts can help you calculate your lendable equity and explore which option is best for you. To learn more, visit our website or call a member service representative at (888) 858-6878.