By Tracy Scott
You’re confident there’s equity in your home. The spread between the market value of your residence and the mortgage principal balance continues to expand. This is good news for you and other homeowners in similar situations. It’s estimated that Americans have nearly $16 billion of equity available in their homes. Homeowners can access a percentage of that cash value without selling their homes by applying for a home equity loan or home equity line of credit, aka “HELOC.” However, it’s essential to understand the difference between each type of loan before deciding to access these funds.
What do home equity loans and HELOCs have in common?
Home equity loans and HELOCs are both loans secured by the residence. If a loan default occurs, the lender may foreclose on the property. Both loans also offer tax benefits. Interest paid is tax deductible if the loan funds are used to buy, build, or substantially improve your main home or second home. Taxpayers should review the Tax Cuts and Jobs Act, which became effective in the 2018 tax year, for additional details and limitations.
What are the differences between a home equity loan and a HELOC?
At many financial institutions, approval for a home equity loan results in the funds being disbursed in one lump sum. Borrowers are then free to use the funds as they choose. Repayment mirrors that of a traditional mortgage in that monthly payments are for a specific term and at a fixed interest rate. Home equity loan payments remain the same over the life of the loan.
Home equity loan borrowers often:
- Desire a low, fixed-rate loan
- Prefer predictable monthly payments
- Have a specific home improvement project or purchase in mind before applying for the loan
Traditionally, a HELOC’s approval and use are similar to an adjustable interest rate credit card in that a maximum credit limit is set for the loan. Borrowers do not have to withdraw the full loan amount upon approval. Access to the funds is made available using a debit card or bank account in increments established by the lender.
HELOC users do not re-apply for additional funds during the loan period. As the loan is repaid, the balance decreases, and the available credit increases, similar to a credit card. Payments fluctuate based on the amount owed on the loan and the current interest rate assigned to the loan balance.
Individuals who prefer a HELOC often:
- Expect to use funds over the course of several months or years
- Want to avoid high-interest rate credit cards to pay for large purchases
- Anticipate the total cost of a project might change, e.g., home improvement project completed in phases such as a room addition
Should you choose a home equity loan or a HELOC?
Generations Federal Credit Union (GFCU) understands that financial predictability is essential when setting and achieving financial goals. When your monthly expenses remain the same, money management becomes less complicated.
With GFCU, you don’t have to choose between these two options. We offer a fixed interest rate HELOC with repayment terms of up to 15 years and interest-only payments for the first five years. Members can experience the flexibility of a home equity line of credit and the security of a home equity loan. Only withdraw the amount you need without the worry of rising interest rates.
When you access your home equity with a HELOC, you can use the funds to:
- Consolidate debts, e.g., high-interest credit cards, medical bills, etc.
- Make substantial home improvements
- Assist with college related expenses for children or grandchildren
- Cover the cost of special events that exceed current savings, e.g., family reunions, wedding anniversary trips, college graduation celebrations, etc.
Ultimately, it’s your equity. You decide how to use it.
Home equity loans and lines of credit offer qualified homeowners a low-interest way to fund home improvement projects, pay off high-interest debts, or bridge the financial gap between available savings and desired purchases. Whatever your preferred form of financing, you can apply for a fixed interest rate HELOC or a Home Equity Loan with Generations Federal Credit Union. Contact a representative today!