What Is A Home Equity Loan And How Can You Use It?
How does a remodeled bathroom sound? A new kitchen with complete with all stainless steel appliances? A first-class wedding reception? A dream vacation? Maybe you just want to pay off that huge credit card balance.
A home equity loan is a great way to pay for things in life that you might not otherwise be able to afford. But, just what exactly is a home equity loan and how might you use it?
A home equity line of credit allows you to borrow money using your home’s equity as collateral. Let’s dig a little deeper into that.
Collateral is property that you pledge as a guarantee that you will repay a debt. If you don’t repay a debt, such as a loan, the lender can take that property (collateral) and sell it to get the money back. A home equity loan means you pledge your house as collateral.
This is the difference between how much the home is worth and how much you owe on the mortgage.
How is it calculated?
Here’s an example: You buy a house for $200,000. You make a down payment of $20,000. Fast forward five years and after paying $13,000 on the mortgage you now owe $167,000. During those five years the value of your home increased to $300,000. You calculate home equity by subtracting the amount owed from the home’s current value (300,000 – 167,000). You would have $133,000 in equity.
There are two types of home equity debt: home equity loans and home equity lines of credit, also known as HELOC. They are both commonly referred to as a second mortgage.
- A home equity loan is a one-time lump sum that is paid off over a set amount of time with a fixed-interest rate and the same payment each month. Once you get the money you cannot borrow further from the loan.
- A HELOC works more like a credit card because it has a revolving balance. It allows you to borrow up to a certain amount for the life of the loan.
LEARN MORE: 5 Questions About Home Equity Answered
Which one is better for you depends on a number of factors. Stop in to an Honor Credit Union member center today to talk with one of our knowledgeable team members about using your home’s equity.
How to use it
The first thing to remember when considering taking out a home equity loan is to be smart about it. Think about what you are going to use the money for beforehand and have a plan in place. One of the most sensible ways to use your home’s equity is on a home improvement project as that will likely increase your home’s value as a return on the investment. You can also use it to pay off debt, such as credit cards, auto loans, or high-interest personal loans.
Other potential uses for a home equity loan:
- Debt consolidation
- Student loans
- Auto loans
- Wedding expenses
- Major medical expenses
- Home improvement
- Expensive vehicle repairs
- Major purchase
Ask an expert
If you are considering a home equity loan or home equity line of credit, one of our home loan experts can answer any questions you might have and help you determine how much you can borrow.