Real Estate:
Access Your Home Equity

If you own a home, you may be able to borrow money using your accumulated equity to secure the loan.  That equity -- the difference between the market value of your home and what you owe -- can be accessed in a couple of different ways: a home equity loan or a home equity line of credit.

How are they different?
Think about a home equity loan as one that is similar to other consumer loans.  You get a one-time lump sum amount that you repay in monthly installments over an established period of time. This loan usually comes with a fixed interest rate although variable rates are also available.  The repayment period varies, with the more common time frames ranging from 10 to 15 years.  You pay principal and interest each month just as you do for your first mortgage.

A home equity line of credit (HELOC) operates a little differently than a home equity loan.  It is revolving credit, usually with a variable rate; and it acts more like a credit card than a loan.  You have a maximum spending limit.  Thus you can spend, repay, and then spend more up to your approved limit.   This gives you flexibility to access money when you need it and as often as you need it.  Access is available through a checkbook or through a credit card. Once you access the line, you begin making payments.  You can pay the minimum due, the full balance or something in between.  A HELOC is available for you to draw on for a fixed period of time, typically 10 years.  At the end of that draw period, many HELOCs have an additional period of time during which you would pay off the full balance plus interest.

What do the two have in common?
Both a home equity loan and a HELOC are considered second mortgages.  Each is secured by the equity in your home.  Both are also long-term debt.  For this reason, the interest rate is typically lower than that on credit cards or other unsecured personal loans.  The interest on both may be tax deductible up to a certain amount.  You should consult with your tax advisor for details.

Whether you are getting an equity loan or a line of credit, you can expect to go through an approval process.  In addition, because you are borrowing against the equity in your home, your lender will most likely request a real estate appraisal.  This is to confirm the current market value so that equity can be accurately determined.

You can borrow up to 100 percent of the equity in your home with either the loan or the line of credit.  Some lenders will even allow you to borrow up to 125 percent of the value of your home.  How much you can borrow depends on the value of your home and your current loan balance, as well as other qualifying factors like your income, credit standing, current debts, payment history, etc.

How do you decide which is right for you?
If you need a one-time infusion of cash, then a home equity loan may make sense for you.  If on the other hand you anticipate needing cash periodically, you might consider a line of credit.  Also think about your preference for monthly payments.  A home equity loan requires a set monthly repayment of principal and interest for the life of the loan.  With the line of credit, you choose how much you will pay as long as you meet the minimum payment.

No matter which way you choose to tap into the equity in your home, remember that your home is collateral for both the equity loan and line of credit.  If you do not repay, you run the risk of losing your home.  So exercise due diligence in your decision-making process, shop for the best interest rate, and adhere to all the repayment terms and conditions.  And, keep in mind that if you sell your home while you have an outstanding balance on either your loan or line of credit, you will need to pay off that balance when you close your deal.

Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.