05/01/2013 How To Determine If a Home Equity Loan Is Right For You
Home Equity Loans are financial vehicles created to help homeowners borrow money against the equity in their homes. There are two types of home equity loans – Home Equity Loans and Home Equity Lines of Credit.
A Home Equity Loan can be a great financial vehicle to help you achieve some of your financial goals. It allows you to borrow money against your home for financial needs you’ll face at the different stages in your life. You may need extra funds to help consolidate debt, to make home improvements, to pay for college tuition, or to plan your child’s special wedding.
The first step in determining if this type of loan is right for you is determining if you have equity in your home right now. Chances are if you’ve owned your home for more than a few years, you may. A simple formula for determining your home equity is to subtract the amount of the mortgage balance from the current fair market value of your home. In other words, your equity increases as your mortgage balance decreases. If your home has been appraised for $250,000.00 and you owe $150,000.00 on your mortgage, your equity is $100,000.00. Actually, there is a bit more to it. For example, consider the fact that many homeowners have liens or second mortgages on their homes. These amounts must also be subtracted from the appraised value to determine home equity accurately.
Once you’ve determined that you have equity in your home, this is where you can put it to work for you. You can borrow against it for home renovations, debt consolidation, college tuition, or for things like investments in business ventures. You may borrow up to 80% of the equity in your home, so the next step is determining if you should take out a loan or line of credit.
A Home Equity Loan will give you one lump sum and will offer the same monthly payments for the life of the loan.
The second home equity vehicle is a Home Equity Line of Credit. A Home Equity Line of Credit will offer a variable rate and a revolving line of credit. This offers flexibility because borrowers can access money repeatedly and in varying amounts as needed. Once opened it operates like a credit card – you’re given a credit limit that you can borrow against, and paying down your debt frees up more credit that you can potentially spend. Home Equity Lines of Credit have variable interest rates that are typically tied to the prime rate. Many people use their lines of credit to help carry them through tough times like after a job loss. It is important to remember that your home is the collateral for these loans so you should consider this type of financing carefully.
The rate environment will often times dictate what type of loan will be best for you, so it is important to review all options including what fees are associated with each so you can determine which is best for your situation.
Keep some headroom. You should try to keep a cushion of at least 20% equity in your home. If your combined mortgage and home-equity borrowing exceeds that amount, you'll pay higher interest rates. You're also cutting yourself off from an important source of funds in an emergency.
As with anything in life, use your home equity loan in moderation. Don’t use it to live beyond your means; use it to help you manage your finances. Talk to your trusted financial advisor before deciding if a home equity loan or line of credit is right for you. It can be a smart financial vehicle for you.
Our dedicated and highly trained Loan Experts are available for all of your questions and concerns and are fully prepared to guide you in the right direction. If you would like more information on our Home Equity Loan or Home Equity Line of Credit products, call a Loan Expert directly at 855.MY CU LOAN (855.692.8562).
| Most-common uses of home equity borrowing |
| HELOC | Use | Home equity loan |
| 40% | Debt consolidation | 44% |
| 23% | Home improvement | 25% |
| 7% | Automobile | 7% |
| 6% | Education | 4% |
| 6% | Major purchase | 2% |
| 3% | Investment | 2% |
| 2% | Household expenditures | 2% |
| 2% | Business expense | 1% |
| 1% | Medical | 1% |
| 1% | Vacation | 1% |
| 9% | Other, don't know | 11% |
| Source: Consumer Bankers Association |
Thomas J. O'Shea
President/CEO
