Your home is where your family makes memories. But it can also help you prepare for the future.
As your family grows, your home can provide the financial support you need to achieve your next goal, whether it’s making renovations, purchasing a vacation home or sending your kids to college.
If you’ve built up equity in your home, you may be eligible for a home equity loan (HELOAN) or home equity line of credit (HELOC), which can be used to fund a variety of goals and projects. Based on a specified maximum debt-to-value ratio, lenders will agree to let qualified customers to borrow a percentage of the value of their home, using the home as collateral for the loan.
Here’s how it works: Let’s say your lender sets the maximum loan-to-value ratio at 80 percent and an accredited appraiser has valued your home at $200,000. If you owe $125,000 on your mortgage, you’ve built up $75,000 in equity. This means you could take out equity home loan (HELOAN) of $35,000 ($200,000 x .80 = $160,000; $160,000 - $125,000 = $35,000).
Home Equity Loan Versus Line of Credit
Most HELOANS are structured such that, you receive a lump sum of money and pay it back in fixed monthly installments over a fixed period of time, typically 10 to 15 years. The most common HELOAN has a fixed interest rate that is locked in when you secure the loan.
A HELOC functions much like a credit card where you pay a minimum amount each month or more if you want to pay down the principal on the debt, and you pay interest only on the amount you've borrowed, not on the entire line amount.
When deciding whether to take out a HELOAN or HELOC, consider your goals, the payment schedule, and your spending habits and risk tolerance. A HELOAN might be best for a one-time goal, like a home improvement project that can improve the value of your home. Because a HELOC can provide more repayment flexibility and lets you borrow only the amount you need when you need it, it might be better suited for a longer-term goal or unexpected expenses.
Of course, both HELOANs and HELOCs bring some risk. You put your home at risk of foreclosure if you don’t make the required payments, so be sure to assess your monthly budget before committing to take on this added expense. Also consider whether there is an alternative way to borrow money that accomplishes your lending objectives and does not come with the same type of risks.
If you think a HELOAN or HELOC might help you meet a family or financial goal, talk to your financial advisor to help determine if tapping into your home equity is your best option.