If you’re a home owner looking to finance those spring home improvement projects, consolidate monthly bills, or pay rising college tuition costs, a home equity loan is a great option to consider. It can be among the most affordable borrowing options out there. Here’s some information to help you decide if a home equity loan is the right option for you.
Most lenders will allow you to borrow up to a certain percentage of your home’s value minus any balance already owed on the property. Percentages vary by lender so be sure to ask each lender what they allow.
Here’s an example:
Home’s appraised value: $200,000
Percentage allowed: x 85%
Total: = $170,000
Existing mortgage: – $100,000
Equity available: $70,000
Once you determine the amount you may borrow, consider the type of loan you want.
With a home equity installment loan, you receive a single lump sum of money that you pay back with interest over a specific length of time called the term. Consumers can use the funds for purchases or expenses like buying a new car or consolidating high interest credit card debt. Home equity installment loans often offer fixed interest rates, which are determined by the length of the repayment term. A fixed rate home equity term loan can offer the security of a set monthly payment
If you would like the flexibility to borrow various amounts over time, a home equity line of credit may be a better option. A home equity line of credit provides revolving access to funds up to your credit limit. You access funds as needed over a period of time called the draw period. As you pay back your outstanding balance, the funds become available again for use. Home equity lines are commonly used to finance on-going home improvement projects and re-occurring college tuition bills. Interest rates on a home equity line are usually variable and tied to an index. It is important to know the index used, how often it may change, and if a margin will be added to the index. Monthly payments on a line may vary and are based on the outstanding balance.
If you like the convenience of the line of credit but want the security of the installment loan, contact your financial institution. Many lenders now offer home equity lines of credit with fixed rate options. You can take advantage of a variable rate line when the rates are low but lock in outstanding balances for a fixed rate and term when those rates begin to rise.
When shopping for a home equity loan, keep in mind any fees or closing costs. Most fees are included in the annual percentage rate (APR) on home equity installment loans, but on a home equity line of credit they are not included in the APR and need to be evaluated separately. Closing costs may include appraisal fees, title insurance fees, mortgage and filing fees, and taxes.
Using your home equity as collateral for a loan is a big decision. Before you sign on the dotted line, read these brochures which help you shop smart, stay safe, and find the right loan for you.