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Home Equity Loans Explained

Posted on May 03, 2017 by Jake Ward
Maybe you’re interested in home renovations, debt consolidation, higher education, or maybe you want to help pay for your daughter’s wedding. If you’re a homeowner looking to borrow money, a home equity loan or line of credit (HELOC) from R.I.A. Federal Credit Union might be the versatile loan option best for you.

The Importance of Equity

With home equity financing, you are looking to borrow against the amount of “equity” you have in your home. Equity is determined by subtracting the balance that you owe on your first mortgage (and any other home loans) from the appraised value of your home.

So you’ll need to make sure you’ve paid off enough of your mortgage to qualify. A financial institution will secure the ‘second lien’ on the property, and for your loan to be approved there needs to be equity available.

Let’s say you purchased your home for $200,000 and you currently owe $100,000 on the loan. If your home is appraised at $250,000, that gives you $150,000 in available equity.

R.I.A. Federal Credit Union is unique in that we allow members to borrow up to 95% of your home’s value. Many other lenders cap borrowing at 80% of the home’s value. So, in the example, you could potentially borrow up to $137,500 up to 80% loan to value (LTV) and $100,000 up to 95% LTV with R.I.A. FCU where other lenders may only allow you to borrow $100,000.

Lower Interest

Home equity loan and line of credit rates are typically low and quite attractive, although they vary based on your credit history, the amount of equity in your home, and the terms of the loan. In general, you can expect these rates to be significantly lower than the interest rates on a personal loan or credit card, making them an excellent option to consider for qualified homeowners.

Tax Advantages

There may also be tax advantages. Just like mortgage interest, a home equity loan or line of credit interest can be a tax deduction. It’s important to consult with your tax professional before assuming you can deduct the interest paid on a home equity loan or line of credit.

About Home Equity Loans

Home equity loans are available as a lump sum one-time draw, meaning you get the money all at once. So they are a good source of money for major projects and one-time expenses. They typically have a fixed interest rate, meaning the payment is the same each month; that makes them easier to factor into your budget. But remember: your home equity loan payment will be in addition to your usual mortgage payment.

HOME EQUITY LOANS PROS AND CONS

  • Pro: A fixed interest rate.
  • Pro: Interest paid is usually tax deductible.
  • Con: Tapping all the equity in your home in one fell swoop can work against you if property values in your area decline.

About Home Equity Lines of Credit

Where a home equity loan gives you a sum of money all at once, a HELOC is similar to a credit card: you have a certain amount of money available to borrow and pay back, but you can take what you need as you need it.

HELOCs often begin with a lower interest rate than home equity loans, but the rate is adjustable, or variable, which means it rises or falls in accordance with the prime rate. That means your monthly payment can rise or fall, too.

HOME EQUITY LINES OF CREDIT PROS AND CONS

  • Pro: Payments are based only on the amount you draw, not the total equity available in your credit line.
  • Pro: Fully amortizing loan so there is no balloon balance at the end of the draw period.  Full principal and interest payments are made on the outstanding balance.
  • Pro: Interest paid is usually tax deductible.
  • Con: Rising interest rates can increase your payment.
  • Con: Without discipline, you might overspend, tapping out the equity in your home and finding yourself saddled with large principal and interest payments during the repayment period.
To find out more information, contact R.I.A. Federal Credit Union, check out our Fixed Rate Home Equity Loans and Home Equity Lines of Credit, or apply for a loan now.