As a homeowner, it’s a near certainty that there will be times when leveraging your home’s equity — the difference between the appraised value of your home and what you owe on the mortgage — will enable you to afford certain larger expenses. This can be done in two ways: a home equity line of credit (HELOC) or a home equity loan.
Navigating these options can be confusing, and even intimidating, especially if this is new territory for you. As we stated in a recent blog post, you should really only consider these options if your mortgage is less than 80 percent of the home’s value. If that is the case, the next step is to decide which borrowing method is best for your needs. Understanding the distinctions between them will help you make the right choice.
What is a HELOC?
A home equity line of credit provides a sum of money that a borrower can draw from on an as-needed basis, almost like a credit card, for a predetermined time frame. The repayment period that follows can be up to 20 years and has an adjustable rate that changes with the market. As with a credit card, you are only charged interest and make payments on the amount you borrow, not the full amount available. Ask your lender if they offer fixed rates during the draw period, such as those NVE Bank offers borrowers.
What is a Home Equity Loan?
With a home equity loan, a borrower receives the total loan amount up front and pays it back over a fixed term at an interest rate that is locked in. You may have heard it referred to as a second mortgage. The amount you can borrow depends upon the equity you have in your home, your income, credit history, and the market value of your home. Like a HELOC, this type of loan is attractive because its interest rate is typically lower than those associated with credit cards or unsecured bank loans.
When it comes to figuring out which type of loan is best for you, there is rarely an absolute answer; it all depends on the details. To help determine which loan is best, ask yourself the following:
- When do I need the money?
- Is it for a short-term purpose, or over a longer period of time?
- How much time do I need to pay it off?
- How big a monthly payment am I able to afford?
- Do I have the discipline to refrain from using money available via a line of credit that I don’t need?
There are common circumstances that lead homeowners toward one type of loan over the other, historically speaking. For example, a HELOC generally makes more sense if you need smaller amounts over a longer period. Examples of common uses for home equity lines include:
Home repairs. If your home is in need of essential maintenance or repairs, such as those that address safety issues or structural integrity.
Home renovations. If you are planning to sell soon — or eventually — and would like to try to increase the potential resale value or your home. Alternatively, if you plan to stay in your “forever home” and would like to improve your quality of life.
Business funding. Many entrepreneurs and small-business owners require capital to get off the ground. A word of caution here; be sure you can pay off the debt regardless of the success of your business.
Fun fact: Community Banks have long been a primary source of credit for small businesses. NVE Bank has supported businesses in Northern New Jersey since 1887!
A home equity loan usually fits the bill for those in need of a larger amount, all at once, for a specific project or purpose. This type of loan may satisfy the following circumstances:
Consolidating debt. If you have high-interest credit card debt, paying off these credit cards with a home equity loan will allow you to repay the debt at lower interest rate. But once your debt is paid off, don’t repeat the cycle!
You know how much you need. If you know the exact amount of money you need to borrow and don’t have plans to borrow again.
Don’t get in your own way.
In order to secure — and keep — either loan, you as the borrower must demonstrate that you are a worthwhile investment. Home equity loans and lines provide financial relief and convenience for many homeowners, but don’t lose sight of the facts. Your home is not just a means to secure this financing; it is on the line, so to speak, as collateral. If you don’t pay your debt to your lender, your home may end up being the very thing that fulfills that obligation.
It is always a good idea to review any options you’re considering and seek counsel from real estate and financial professionals. NVE Bank’s lending portfolio includes a variety of plans to accommodate your personal needs, as well as Lending Specialists who can help you select the best option for your particular situation.
For more information, visit our website to learn more about our loan options and rates or call 1-201-816-2830, ext. 1230 to speak to one of our Lending Specialists.