Your home is more than just a place to live; it’s a powerful financial asset that you can use to achieve your financial goals. By tapping into your home’s equity with ABC Bank, trusted partners that know and care about our customers and communities, we can help you secure the financing you need to make home improvements or cover an unexpected expense You might consolidate any outstanding debts you have into one affordable monthly payment and possibly obtain a lower interest rate to save money.
What is Home Equity and How Does it Work?
Home equity is the current market value of your home minus any outstanding mortgage. For example, if you paid off your mortgage and have no debts on your home, then your equity would be 100% of its current market value. If you could sell your house today for, let’s say, $300,000 and you owed $200,000 on your mortgage, then your equity would be $100,000.
If you’re currently making mortgage payments, then you’re constantly building equity in your home by paying off the loan. Your home’s equity can also grow as property values rise.
Home Equity Loan vs. HELOC: What’s the Difference?
With a home equity line of credit (HELOC) or a home equity loan, either option uses your home’s equity as collateral. They both offer lower interest rates than you might obtain through other borrowing options, such as a credit card or a personal loan.
When you obtain a home equity loan, you receive a lump sum of money at a fixed interest rate, with a set repayment schedule. It’s like having a second mortgage.
A HELOC is a type of loan that you could tap into whenever you need, like a credit card, but with lower interest rates. Some of our customers use a HELOC as a type of emergency fund that they have on hand, just in case.
You wouldn’t have to make any interest payments on your HELOC until you use the funds, which is known as the draw period, which typically lasts 10 years. During the draw period, you would make interest-only payments each month. When the draw period ends, you can no longer withdraw funds and will start the repayment period and pay off the loan. The repayment period may last for 7 to 10 years.
Another key difference between HELOCs and home equity loans is that home equity loans offer a fixed interest rate and a set repayment schedule. HELOCs offer more flexible borrowing over time, as you need it, with a variable interest rate.
The Pros and Cons of Home Equity Loans and HELOCs
By using your home as collateral, you can typically obtain a lower interest rate than an unsecured loan, such as credit cards or personal loans. You could also borrow more funds with a secured loan, which can be useful for making a large purchase or investment in your home. Another advantage of home equity loans and HELOCs is that you can use these funds for just about any purpose, such as consolidating your debts, covering medical expenses, or paying for home improvements.
Many of our customers use a home equity loan or a HELOC in Texas or Colorado because the interest payments may be tax-deductible. According to the IRS, you can deduct your interest payments from income taxes if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan, and you meet other requirements. Please contact your tax attorney to see if you qualify.
Of course, any type of loan is going to have risks. Because you’re using your home as collateral, if you were unable to pay off the loan and defaulted on payments, you could lose your property in a foreclosure. Another potential issue is the chance of a decline in the housing market. While the value of most homes in America increases over time, there have been occasional downturns in the real estate market. If this happens, you could wind up owing more money on your loan than what your home is worth.
There are also going to be closing costs and fees on your loan, just like you would have with a mortgage. Closing costs are based on the total loan amount and may vary.
With either option, if you’re using your home as collateral for a loan, you’ll need to carry property insurance. You might also need additional property insurance coverage, such as flood insurance.
Important Factors to Consider Before Borrowing
As you consider your options for home borrowing, there are a few things to consider. You might start by looking at how much equity you have in your home, as this will have a direct impact on how much you could borrow. This is what’s known as a loan-to-value limit.
HELOCs typically have a variable interest rate. Deciding between the two is like choosing between a fixed-rate and variable-rate mortgage. With a fixed-rate HELOC, the interest rate doesn’t change during your draw or repayment period.
With a variable-rate HELOC, your monthly payments would change if the rate on your loan fluctuates. With a fixed-rate loan, your monthly payments would remain the same during the repayment period.
Your repayment terms will be set when you obtain your HELOC. You’ll need to consider what your financial situation will be when the repayment period starts, and your ability to make the monthly payments, as well as your closing costs and fees.
How to Choose between a Home Equity Loan or HELOC
The best option for you depends on your specific situation. HELOCs may offer a fixed or variable interest rate. A variable rate can fluctuate in response to the Federal Reserve and market forces. While variable rates often start off lower than a fixed rate option, that variable rate could wind up being higher than a fixed rate loan that was obtained when rates were lower.
For many consumers, this question comes down to how much money they need and when they need it. If you need a lump sum of money for a particular need, such as a home remodel or a large purchase, you know exactly how much money you need, and would prefer a fixed interest rate, then a home equity loan might be the right option for you.
If you’re not sure how much you may need to borrow, when you’ll need the money, and would like a pool of funds available that you could tap into on an as-needed basis, then a HELOC could be the right choice for you.
At ABC Bank, we help our customers make these kinds of decisions all the time. We can help you understand and compare all your options to help you choose a loan that fits your needs.
Turn Equity into Opportunity: 5 Smart Ways to Use a Home Equity Loan or HELOC
There are many reasons why our customers pursue a HELOC or a home equity loan. Of course, with any borrowing, you must do so with a clear plan for how and when you’ll pay back the loan. Here are the most common reasons:
Home Improvements
You can spruce up your home to increase its value and make it more comfortable. You might consider purchasing more efficient appliances and upgrading your installation to reduce your utility bills. Perhaps you have an unfinished basement that you’d like to turn into a rec room, or a three-season room that you’d like to use year-round.
Debt Consolidation
A home equity-based loan offers lower interest rates than what most people pay on their credit cards. You might have other debts to cover, such as personal loans. With a home equity loan or HELOC, you can consolidate your debts into one monthly payment and potentially save money on interest payments.
Medical Expenses
Medical debt and unexpected healthcare costs can take a significant toll on people’s wallets these days. Rather than putting this debt on a credit card, you could tap into your home’s equity and receive a lower interest rate.
Starting a Business
You may have a hobby or a side gig that you’d like to turn into a business venture. If you’re just getting off the ground and not ready or eligible for a traditional business loan, a HELOC or home equity loan could give you the capital you need to get started.
Make Your Home’s Equity Work for You
For many people, their home is their greatest asset and a huge investment. Tapping into your home’s equity with a HELOC or home equity loan can be a great way to make this asset work for you, if it’s handled wisely. As with any loan, it’s important to avoid borrowing more than you can afford to pay and to make sure you’ll be able to make the monthly payments when the repayment period starts. As you make your financial considerations, you also need to keep in mind the fees and closing costs that are involved. At ABC Bank, we’re ready to help you explore all your home borrowing options safely and confidently.
Why Choose ABC Bank for Your Home Equity Loan?
With ABC Bank, you’re dealing with a locally focused bank and experts who understand the markets in Texas and Colorado. Our lending decisions are local decisions that provide solutions, made by people who understand the local economies and real estate markets. The person who approves your loan could be someone who lives in your neighborhood. As a local bank, we are committed to the success of all our customers and those in the community.
We can guide you through the entire lending process and help you consider your options, while offering competitive rates and transparent terms.
Are you ready to unlock your home’s potential and make your equity work for you? If you need a HELOC or home equity loan in Austin, Addison, Lubbock, Plano, or Wolfforth, Texas, or Colorado Springs and Pueblo, Colorado, please check out our home equity loan page for more information. You can also contact us or visit one of our many locations to speak with a local lending expert.
If you’re looking for general financial advice and money management tips, you can also check out our FDIC Money Smart program online, which offers educational resources on numerous financial topics.
