With a home equity line of credit or home equity loan, homeowners have a great way to finance home improvements, college tuition, consolidate debt, and more.
The basics of home equity
Equity in a home is the difference between what you owe on the mortgage and how much your home is worth. For example, if you owe $100,000 on your mortgage and your home is worth $225,000, then you have $125,000 of equity in your home. Equity increases as you pay off your mortgage and as the value of your home increases (year-over-year, increases in value are typical, though not guaranteed). Often, the equity in the home can be tapped as a funding source for making home improvements, paying for college tuition, consolidating debt, etc.
Home equity loans and lines of credit allow homeowners to borrow money based on the equity in their home. Equity is the difference between what is owed on the home mortgage and what the home is currently worth. A line of credit provides the borrower with a set credit limit, much like a credit card, and can tap the line as needed. Interest only accrues on a line when the funds are used. A loan provides a one-time amount that the borrower receives all at once and pays back with principal and interest at a set amount over an agreed-upon amount of time, just like a mortgage.
A Home Equity Line of Credit (HELOC) is a source of revolving funding secured against the equity in a residential home. It has two phases, the draw period (during which you used the funds) and the repayment period (paying off the line). The interest rate is variable.
Using a home equity line of credit
A HELOC is most commonly used for home improvements, but it can be a low-cost source of funding for paying college tuition, consolidating debt, or other large expenses.
It’s common with a HELOC to receive checks that you can use to make your payments. You can also use online or mobile banking to transfer funds. It is important to manage your Home Equity Line of Credit as you would any other account, reconciling the account on a regular basis.
This can vary with the terms of the HELOC. If you are unsure about the terms of your line, check with a lending representative before deciding how you want to structure your draws from the line.
Rates and terms
Home equity loan rates are usually more favorable than other loan options. Because they are secured against the inherent value in your home, they are deemed less risky. When the risk is lower, lenders typically offer better rates and terms. In addition, home equity loan rates are often the subject of special promotions and discounts. Always check with a lender about special home equity loan rates that may be in effect. GRB currently has a HELOC special.
You will make minimum payments during the draw period. Once the line of credit is in the repayment period, you pay principal and interest on the amount borrowed. Some HELOCs have an early prepayment penalty, always check the terms of the line before closing it out.