When most people purchase a home they take out a large loan and pay the lender back over the course of several years – this is called a mortgage. But there’s a way to borrow money using the value of your home as security to the lender. Sometimes called second mortgages, these two types of loans are known as closed-end loans and home equity lines of credit (HELOC). Both are typically for a shorter term than a first mortgage, with a life of five to 15 years.
How much can I borrow?
Home equity is generally defined as the current value of the home minus any liens against it. Let’s say you’ve paid off $150,000 of a $250,000 mortgage. Your home equity is around $150,000.
How much do I need to borrow?
This is where the major differences between home equity loans and HELOCs come in to play. If you have a specific amount you need to borrow for a one-time event, and want to pay it back much like your mortgage, a home equity loan may be the right way to go. You borrow a set amount and repay it with fixed monthly payments – usually with fixed interest rates. The downside to a home equity loan is the money is received as one lump sum and you cannot draw additional money from the loan. The interest rates are also generally higher than those associated with a HELOC because of the security of having a fixed rate.
If you’re looking for a large amount of cash, but don’t know exactly how much you’ll need at any given time (a home remodel is a great example), a HELOC may be the right choice. HELOCs work more like credit cards, where lenders provide a line of credit and allow you to withdraw funds up to your maximum credit line as needed (usually with a debit card tied directly to the line of credit). HELOCs require monthly payments and when the repayment period is up you’ll need to pay back any remaining balance. The added bonus of a HELOC is the credit line is revolving, meaning once you make payments back toward your line of credit, those funds are available to be borrowed again.
Why would I borrow against my home?
The decision to take out a home equity loan or HELOC is a personal one. The appeal of both loans is usually their interest rate, which is almost always lower than a credit card or personal bank loan. For example: If you have outstanding credit card debt with a high interest, a home equity loan could allow you to pay it off in full, then pay back the home equity loan at a much lower interest rate. And, the interest you pay toward a HELOC or loan may be tax deductible. A trusted lender can help you decide if a HELOC or home equity loan is right for you.
Citywide Home Loans make the loan process simple. Visit www.citywidehomeloans.com to see how much home you can afford and find a loan program that’s right for you.