In a tight housing market, homeowners looking for more space or finer features are feeling a little stuck. Therefore, many are finding ways to upgrade by tapping into the equity they hold in their home. The cash you can access with a home equity line of credit, or HELOC, can be used for whatever you want: a vacation, a wedding, tuition, or surprise expenses. Evergreen Credit Union is a reliable, local lender for any homeowner looking for ways to finance their renovations and expand their love of their home. These are the basics to understanding HELOCs and home equity loans. Write down your questions and reach out to a lender like Evergreen to see how they can help you create your dream home.
What is equity and how can I unlock it?
Equity is the difference between how much your home is worth, based on a current appraisal, and the balance left on your mortgage. As you pay down your mortgage the equity in your home grows.
A traditional home equity loan gives a borrower a lump sum upfront in return for fixed repayments monthly over the life of the loan. This is also known as a second mortgage. Lenders will often let you borrow against a substantial percentage of your home when you use this product. A home equity line of credit or HELOC approves the borrower for an overall credit limit that they can withdraw from as they need it, instead of receiving a lump sum.
In both scenarios, the loan has term limits, and the borrower uses their home as collateral, so the lender can take possession of the house if too many payments are missed.
Differences between HELOC & Home Equity Loans
A major difference between a HELOC and home equity loan is the predictability of payment amounts. HELOCs typically have a variable interest rate, so your monthly payment may fluctuate. A home equity loan usually has a fixed rate, which translates into constant monthly repayments.
Once approved for a HELOC, the borrower has a draw period, a set time that they can withdraw from the credit line. When that time is up, the repayment phase begins, with payment amounts based on the amount that you advanced, not the entire credit limit for which you were approved. Borrowers should be ready for their monthly expenses to jump up as they start to pay down the principal.
To borrow or not to borrow
A last bit of advice: just because you can borrow from your home does not mean you should. Owning a home in a robust Maine market is an asset, so recognize when you borrow against this value that you are increasing your debt-to-income ratio and potentially reducing your net worth. On the other hand, borrowed funds used to improve your home should increase its value, thereby actually making your home loan a sound investment that pays you back when and if you sell the property.
Is a HELOC loan right for you? Everyone’s finances are unique. Find out more details by visiting egcu.org/equity or contact Evergreen Credit Union at 207-221-5000 and ask to speak with a home equity loan specialist.
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