With the increase in home values over the last few years, homeowners who want to get cash out of their homes – but don’t want to move or refinance their existing mortgage – can access the value in their homes with a home equity loan or home equity line of credit (HELOC).
Borrowing against your home’s equity can give you the flexibility to access funds when you need them for a large expense – like transforming your home with a remodel, paying for a wedding, consolidating debt or even starting a business – and usually at a rate that’s lower than other types of loans or credit cards.
Equity is the difference between what you owe on your mortgage & the value of your home.
HELOC vs. Home Equity Loan
Both a home equity loan and home equity line of credit use the home as collateral for the loan (second mortgage). The key difference between the two types of loans is how you access the money – as a lump sum or by taking out money against the credit line.
Home Equity Loan
A home equity loan allows you to borrow a fixed amount that you receive in one lump sum. The amount you will qualify for is calculated based on your home’s loan-to value ratio, payment term, your income and your credit history.
Fixed Interest Rates. Most home equity loans have a fixed interest rate and term, which is one of the benefits it has over a HELOC. This means you’ll know what your monthly payment will be for the entire life of the loan. In an environment of rising rates, this is especially beneficial, as your loan will not be subject to the increasing rates of other types of loans.
Payments. With a home equity loan, you begin repaying the loan in equal payments after you receive the lump sum for the term of the loan (e.g., 15 years).
Home Equity Line of Credit (HELOC)
A home equity line of credit is a revolving credit line that allows you to borrow money as needed, up to a limit.
HELOCs allow for more flexibility than fixed-rate home equity loans. Since you’re opening a line of credit and not borrowing a set amount, you can withdraw money as needed over the course of a set amount of time known as the “draw period.”
Variable Interest Rates. HELOCs have variable interest rates. This means the interest you’re paying on the loan can fluctuate over the life of the loan.
Payments. The repayment on HELOCs varies but is usually very flexible. Some require a monthly payment of both principal and interest, while others only require an interest payment each month with the entire loan amount due at the end of the draw period. This can be beneficial when borrowing for an investment or business, as you may not have the funds for repayment on a monthly basis but anticipate earning enough to pay back the entire loan.
Tax Deductible. Another advantage of both home equity loans and HELOCs – the interest paid on the loan may be tax deductible.1
1 Consult a tax advisor for details.
Top Uses of Home Equity
Home improvements. Home renovations can often increase your home’s value and you may be able to deduct the interest paid on the loan from your taxes.1
Business venture or expenses. If you’re starting a business or need funds to cover your business expenses, a HELOC can give you access to funds as needs arise.
Debt consolidation. Using a home equity loan to consolidate debt to one low-interest loan can save thousands of dollars and help shorten repayment time.
Education costs. With low interest rates, funding a college education or paying for continuing education costs with a home equity loan may be a smart choice. However, paying off a federal student loan with home equity might not always be wise, as these loans are sometimes eligible for partial or complete forgiveness.
Emergency fund. A HELOC can give you access to money to use as an emergency fund if the need arises.
1 Consult a tax advisor for details.
Ready to take out a home equity loan?
Before you apply, it’s important to run the numbers so you’re sure you can easily meet the regular loan payments. Otherwise, you risk defaulting on the loan and losing your home.
If you're ready to apply, Arizona Financial offers both types of equity loans with low rates and no closing costs!