Home Equity Basics
What can I use the home equity funds for?
You can use a home equity loan for anything you want. However, borrowers usually use second mortgages for some of life’s larger expenses because homes may to have a lot of value to borrow against. Several popular uses include:
- Remodel, renovate, or otherwise improve the house and property
- Fund the purchase of a second home or land
- Consolidate high-interest debts
How does a traditional Home Equity Loan work?
A Home Equity Loan is just like a traditional loan – the borrower takes a large sum of cash up front and repays the loan over time with fixed monthly payments that include principle and interest. The interest rate is defined when the loan is originated and remains fixed for the life of the loan. Each monthly payment reduces your loan balance and covers some of your interest costs just as with an amortizing loan.
How does a Home Equity Loan Line of Credit (HELOC) work?
A HELOC works very much like a credit card. The borrower gets a revolving line of credit with a maximum loan amount and can borrow funds against it as needed. There’s a maximum loan amount, but the borrower is not obligated to borrow the maximum — the borrower is only charged interest on the outstanding balance.
How do HELOC rates work?
HELOC rates are variable, meaning they will change over the life of the loan. The rate is generally tied to the prime rate and as the prime rate fluctuates, so does the rate on the HELOC. Lenders often have annual caps (maximum rate increases for a given year) and lifetime caps (the maximum rate for the life of the loan).
What are the key benefits of Home Equity solutions?
Low Rates: Home equity loans typically have a lower interest rate than unsecured loans such as credit cards and personal loans. A low rate can help keep borrowing costs low, but closing costs may offset low rates.
Large Loan Amounts: Borrowers can qualify for relatively large loans using Home Equity solutions, assuming there is sufficient equity in the home. For large expenses like home improvements, higher education or starting a business, home equity may be the best source of funding available.
Potential Tax Benefits: Interest on a home equity loan may be tax deductible, particularly if the funds are for ‘substantial improvements’ to a property. Consult your tax professionals to provide details prior to borrowing and tax preparation time.