How to Fund necessary Repairs or Fulfill a Dream
Maybe you’ve been putting off installing new windows or repairing your home’s roof. Or, maybe the itch to buy that sports car is getting stronger.
Whatever your need—or desire—for cash, you can make it a reality with a home equity loan. A home equity loan is easy to apply for and offers rates that are usually lower than personal loans and significantly lower than credit card interest rates.
With the equity in your home, you could make that distant dream a reality.
But first, what is a home equity loan?
The Federal Trade Commission defines a home equity loan as “a loan for a fixed amount of money that is secured by your home.” In layman’s terms, a home equity loan is one in which you borrow against the equity, or value, of your home. The amount of actual equity you have is the difference between what your home would be worth if you sold it today and what you owe on the mortgage.
The loan can be used for a number of things:
- Remodel or add on to your home
- Complete necessary home maintenance
- Buy land
- Return to school or send your high school graduate to college
- Take an exotic vacation (Iceland, anyone?)
- Buy that fantastic sports car
You could also use the equity in your home for more practical purposes, such as consolidating debt or paying off higher rate loans and credit cards. According to TransUnion, more and more homeowners are using these types of loans as home values increase, with far fewer homeowners using this wealth for luxury items.
How does a home equity loan work?
Once referred to as a second mortgage, a home equity loan:
- Can be repaid monthly over a fixed term, just like a mortgage, typically from 5 to 20 years
- Can be set up with any credit union, bank or mortgage company that services home equity loans in your state – you are not limited to the institution that holds your mortgage
- Can be used for any major purchase, such as a vacation, a new boat or a remodeled kitchen, or for any major expense, such as paying off higher interest debt or unexpected medical bills
- Can provide some tax advantages (though it’s best to talk to a tax advisor to be sure)
Typically, the maximum amount you can borrow against the value of your home is 85 percent. At Greater Alliance Federal Credit Union, we allow borrowing up to 80 percent of your home’s value.
Here’s an example of how this works:
The value of your home: $350,000 x 85% = $297,500
The balance of your mortgage: $200,000
The maximum you can borrow: $97,500
Be sure to check with your lender because this borrowing limit can vary. The actual amount your lender might approve is also based on other factors such as your current income, credit history and debt load.
If you choose a home equity loan, remember that you are borrowing against your home. It’s important to pay back the loan as agreed so that you don’t face the potential of losing your home.
Home Equity Line of Credit (HELOC) vs. Home Equity Loan
A home equity line of credit, or HELOC, is like a credit card. It’s a revolving line of credit that you can apply for now and then choose to use:
- Any time you need
- For whatever you need
- For as much as you need within your credit limit
Like a home equity, with a HELOC:
- You borrow against the equity in your home, typically up to 85 percent of the home’s value
- Your home secures the loan
- You have a flexible range of HELOC rates and terms – check with GAFCU or your financial institution to find the best plan to fit your needs
Here’s how a HELOC differs from a home equity loan:
- You make payments on a fixed schedule, but only on the amount you borrow, not on the full credit limit available
- Payments are made with a credit card or checking account attached to that HELOC
- There are often no closing costs
While average HELOC rates are often more than home equity loan rates, experts agree that it is still a much better option than most credit cards. And, if you shop around, you might find a great low-rate offer, like a rate as low as 2.99 percent APR at Greater Alliance.
What Are the Benefits of Using a Home Equity Loan or HELOC?
There are several benefits to a home equity loan or a HELOC. The top reason homeowners use a fixed-rate home equity loan is to pay off credit card debt, because the interest rate is much lower than credit cards or other types of consumer loans. At Greater Alliance, for example, we have home equity rates as low as 2.99 percent APR, compared to the double-digit rates of most popular credit cards.
Other reasons to consider a home equity loan or HELOC:
- It’s an easy source of cash for any reason.
- It’s a more convenient way to manage your bills, by consolidating your debt into one single payment.
- Interest paid on a home equity loan may be tax deductible; contact your tax advisor for more details.
Even if your home is paid off, consider the benefits of a home equity loan or HELOC instead of paying for larger purchases with cash or a credit card. With free pre-approval, a variety of fixed or flexible rates and terms, plus possible tax benefits, you may find it’s a smarter return on your investment in the long run.
How Can I Use a Home Equity Loan or HELOC?
Most people think a home equity loan can only be used to pay off debt or to do work on the home that is used to secure the loan. While it’s true that many home equity loans are used for home repairs or remodeling, there are many more ways to take advantage of a home equity loan or a home equity line of credit.
The equity in your home could be used for:
- Debt consolidation
- Paying off medical expenses
- Investing in big-ticket items, like a car
- Funding or supplementing your child’s (or your) higher education
- Funding a wedding
- A once-in-a-lifetime bucket list vacation
- Unexpected emergencies
A HELOC can be especially beneficial in many of these instances because it is used much like a credit card. As you make larger purchases to remodel your kitchen or work through the to-do list for your dream wedding, you pay off only the amount you’ve spent in monthly increments, as you determined at the time you were approved for the loan.
How Do I Know if I Have Enough Equity for a Home Equity Loan?
There are a number of easy ways to find out if you have enough equity in your home:
- You’ll want to start with a home valuation if your new loan is not with your initial lender or your mortgage is more than six months old. Ask people you trust for a referral, or your financial institution can help arrange this appraisal.
- Use an online calculator to determine which loan is best for you.
- Compare the equity in your home to the amount you want to spend, but remember that the most you can borrow is typically 85 percent of the home’s value.
You can make this process even easier by talking to a Greater Alliance loan officer. Getting a home equity loan from GAFCU is secure, easy and available in many states other than New Jersey.
If you don’t currently have enough equity, we can work with you to decrease the size of your mortgage or build up that equity with biweekly payments, savings accounts or other debt consolidation opportunities.
When Should I Avoid a HELOC or Home Equity Loan?
A home equity loan or HELOC may not be the best loan for everyone. One downside sometimes associated with a home equity loan or HELOC is that some borrowers consider it a quick and short-term solution to a longer-term spending and debt issue, creating a financially unhealthy circle of buying and borrowing and buying and borrowing. Other reasons to avoid borrowing against the equity in your home:
- If you can’t afford the closing costs. While Greater Alliance Federal Credit Union doesn’t charge for closing costs, other lenders do, and those costs can be as much as you paid when you initially purchased the home.
- If you don’t need a large amount of cash. There might be better options, such as a personal loan or a low-interest credit card.
- If you think your income could decrease substantially. If you’re planning to retire or worried about company lay-offs, being unable to pay this loan down regularly puts your home at risk.
- If you need it for day-to-day living expenses. There may be better ways to stabilize your financial situation, like working first with a debt management program or revisiting your first mortgage to refinance or adjust the monthly payment schedule.
Borrowing against the equity in your home can be a money-smart decision but consider your needs and financial stability first and then spend some time comparing home equity rates and terms.
Cash-out refinance option
For Greater Alliance Credit Union members, home equity loans are a good option because they come with no closing costs. However, for those who have a high-interest mortgage rate, a cash-out refinance loan may be a good option. With this type of loan, a borrower refinances for more than their current mortgage and takes the difference out in cash. This option also makes sense when the borrower is refinancing to a lower interest rate and can reduce their overall monthly mortgage payments.
How Do I Know If a Home Equity Loan or HELOC Is Right for Me?
Talk to a loan officer you trust about what your need or dream is. The right home equity loan will provide you with a low fixed or variable interest rate and a manageable monthly payment plan. Your loan office can work with you to determine if you have enough equity established and if your current income and credit score will allow you to get a low-rate loan that can be paid off easily over time.
In general, remember:
- A home equity loan is a great option if you need a one-time, large amount of cash.
- A HELOC is the right option if you need that large amount of cash but might not need it in one lump sum.
We encourage you to contact Greater Alliance or another trusted financial institution to learn more about current offers free pre-approval, to help you plan in advance for those big expenses and to talk you through other options, such as a personal loan or student loan if home equity isn’t the best fit.
Complete the form below or apply today. In no time, you’ll be checking off that next bucket list item, worry- and hassle-free!