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HELOC vs Home Equity Loan

By Heidi Curnow, Numerica Staff

The first time I used a home equity loan was to build a dining space that completely transformed how we use our space. Our family was rapidly outgrowing our home, but I just wasn’t ready to move. Not to mention finding a home that would fit all of our needs was going to bust the budget! For my family, the best option was to renovate.

A home equity line of credit (HELOC) let us borrow money using some of the equity we had in our house. I was able to build a space that now fits my family and stay in the home that we love. And, it was really easy to apply for the line of credit.

In another case, my co-worker was able to use the equity in her home for a home equity fixed-rate loan in order to consolidate her debt. Since the fixed rates were a fraction of what she was being charged on her credit cards.

Both home equity loans and HELOCs allow you to borrow from the equity in your home, but they are two very different lending options.

Home equity

Understanding home equity is key. Equity is the vault of value your home has and is the difference between the market value of your house and the amount you owe. A home’s equity is one of your largest assets, but it’s important to know what your options are to access that value or get a loan.

How to calculate your home equity

To determine how much equity you have in your home, figure out the difference between the appraised value of your home and your current mortgage balance.

Several websites, such as Zillow, can help to provide an estimate of your home’s value. Looking at what comparable homes in your area have sold for is another great point of reference.

Then, look at your last mortgage statement or call the financial institution your mortgage is with to find out your loan balance. Once you have those two numbers, you can estimate your home equity.

The difference between a HELOC and a Home Equity Loan

One of the biggest advantages of owning your own home is the equity that you build in it. This gives you the ability to use a Home Equity loan or a Home Equity Line of Credit (HELOC).

Whether you are looking to make home improvements, consolidate debt, or take a trip, these home loan options help make the most out of your home’s value. So, out of the two, which will work best for you?

A Home Equity Line of Credit (HELOC)

As you re-pay your line of credit, you can borrow from the already approved amount for other things that may come up.

  • Allows you to take out a loan using your home’s equity
  • Borrow as much or as little as you need
  • A Numerica HELOC includes a HELOC Visa® card, making it easy and convenient to use your funds
  • Flexibility to transfer a portion or all of the balance to a fixed-rate loan
  • During the time you can borrow from the line of credit, which is typically 10 years, monthly payments often only cover the interest

A Home Equity Loan

  • Commonly referred to as a second mortgage
  • Paid in one large, lump sum
  • Typically has a fixed interest rate on the entire balance

Repayment terms: HELOC vs Home Equity Loan

A HELOC has two stages that affect your payment. During the first stage, you’re typically only required to pay the interest or a low, minimum, monthly payment. If you have a mortgage, this is an additional monthly payment. For example, this first stage typically lasts 10 years and is also the time period that you can draw from the line of credit . If you still owe money come year 11, your payments will most likely increase to cover the principal (balance) plus interest to help you pay down the balance. This is the second stage. At this point, many homeowners look for ways to refinance their HELOC. Numerica’s HELOC offers a stress-free feature, which allows you the option to bundle the loan into a fixed rate.

Home Equity Loans are typically for a span of five to seven years and have a fixed rate that stays the same from year to year. You simply make a monthly payment over the term of your loan until the balance is paid in full.

How do I access the equity in my home?

You’re ready to use that home equity. Next step is finding out the best way to access it. Jana Erny, Numerica Credit Union Senior VP Retail Experience/Lending and Operations, explains just how to do that.

Steps to get ready to apply for a HELOC or Home Equity loan

Credit

Check your credit score. The better your credit score, the easier it is to qualify for a HELOC or home equity loan and can even get you a lower rate.

Home Equity

How much equity do you have in your home? Double check before applying, or your champagne wishes may be shattered by a beer budget. (Then again, a nice beer budget might be a perfect fit!)

Home worth: $150,000
Remaining loan balance: $75,000
Potential to borrow: $67,500

You can borrow a maximum of 95% loan-to-value. So, take your home’s worth and multiply it by 95%: $150,000 x .95 = $142,500

To figure out how much you can potentially borrow, subtract your remaining balance from the home’s worth: $142,500 - $75,000 = $67,500

Debt-to-income ratio

A good rule of thumb is for total monthly commitments (including the new loan amount) to total less than half of your monthly income. Do you know the 5 things lenders look at before giving a loan?

Your home is your vault of value. Make your home work for you.

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April 23, 2018

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