Home Equity Loan Breakdown

If you've owned your home for a few years, you may have equity built up that you can borrow against in the form of a Home Equity Loan. From home repairs to debt consolidation, Home Equity Loans can provide you with the funds you need to cover the cost of all sorts of things. 

Home equity is the difference between what you owe on your mortgage and your home’s current market value. You can cover the cost of an upcoming project or other expense by using your home's equity to get a Home Equity Loan (fixed rate option) or a Home Equity Line of Credit (variable rate option). Here's a breakdown of both so you can decide which option is best for your needs.

Home Equity Line of Credit

A Home Equity Line of Credit (HELOC) is a revolving line of credit, much like a credit card, that you can access as expenses come up. It has a variable interest rate, meaning the rate can change.

Benefits

• Flexibility: You have a credit limit available that you can draw on as expenses pop up. Even if you don't have an expense right now, having a HELOC available can provide you with peace of mind if an unplanned expense arises in the future.
• Low Interest Rate: A HELOC typically has a lower interest rate compared to a credit card.¹ Plus, the interest you pay may be tax-deductible, depending on how you use the funds.²
• Easy Access to Funds: Once you're approved for a HELOC and complete the loan closing, you can quickly access funds by writing a check or using a debit card.
• Ability to Borrow Large Amounts: Since a HELOC is backed by the equity in your home, it's a secured loan. This allows you to borrow a larger amount of money than you may be able to with an unsecured loan.

Things to Consider

• Variable Interest Rate: Your HELOC will have a variable interest rate, which means it can fluctuate over time. This can make it difficult to predict your monthly payments.
• Temptation to Overspend: The flexibility of a revolving line of credit may make it tempting to overspend and accumulate more debt than you can afford to repay. 
• Interest Only Payments: Some HELOCs require an interest-only payment during the draw period (time you can use the available credit limit - typically 10 years). If you only pay interest during the draw period, your payments will be higher during the repayment period (typically 10 to 20 years) when you have to make both interest and principal payments.

Possible Uses

• Ongoing Expenses: Ideal if you need access to the funds over time such as for home maintenance, home renovations, education costs, or if you want to have it available for emergency expenses.
  
  

Home Equity Loan

A Home Equity Loan is an installment loan paid out in a lump sum at the beginning of the loan. This loan is often referred to as a second mortgage. The Home Equity Loan has a fixed interest rate and fixed monthly payments. 

Benefits 

• Fixed Rate: Your monthly payments remain the same for the life of the loan. Since you'll know how much your payment will be every month, it's easier to factor the payment into your budget.
• Tax-Deductible Interest:  If you use the funds from a Home Equity Loan to make home improvements, the interest you pay may be tax-deductible.²
• Ability to Borrow Large Amounts: With a Home Equity Loan, you'll be able to knock out a large expense all at once, even if it's not related to home improvement.
• Lower Closing Costs: Closing costs may vary, but are typically lower compared to a cash-out refinance. Plus, if you're happy with the rate on your first mortgage, a Home Equity Loan will allow you to borrow from the equity in your home without impacting your first mortgage.

Things to Consider

• Inflexibility: A Home Equity Loan provides a lump sum of money which can make it difficult to access additional funds if something else comes up in the future.
• Higher Interest Rate: The interest rate for a Home Equity Loan may be higher than that of a HELOC.
• Closing Time: Home Equity Loans typically take longer to process and close compared to a personal loan. 

Possible Uses

• Large, One-Time Expenses: Great if you know how much you will need to cover the cost to make a large purchase, fund a home renovation, or cover another expense where you have a fixed budget like a wedding. A Home Equity Loan is also a good option for debt consolidation.

Whether you choose a fixed rate or variable rate option, it's nice to know you can use the equity in your home to cover a wide range of expenses. Explore our Home Equity options to learn more.

¹ When compared to the average credit card rate in the U.S. of 20.4%, according to The Federal Reserve, February 2023 data. 

² Consult your tax advisor for any tax deductions, benefits, or other potential tax benefits regarding this type of loan.