Understanding Home Equity

Understand the basics before you borrow.

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Home equity loans aren't as complicated as getting a mortgage, but they can still be confusing. Make sure you understand your options.

What is a home equity loan or line of credit?

These loans are sometimes also called second mortgages. They are basically a second loan (after your mortgage) that you take out on your house. While your first mortage goes toward buying your home, the home equity loan is available to spend how you please.

What is the difference between a Home Equity Loan and a Line of Credit?

Home equity loans are approved for a fixed dollar amount, have a fixed interest rate, and a fixed repayment term (sometimes 5 or 10 years). You make monthly payments on the loan until it’s repaid.

With a home equity line of credit (HELOC), you’re approved for a total loan amount, but you're not given the money in a lump sum. Instead, you withdraw money as needed. You only pay interest on the money you've withdrawn. The interest rate on the loan is usually variable and will rise or fall over time along with the Prime Rate set by Federal Reserve.

How much can I borrow?

The amount of your loan will depend on the value of your home, how much you owe on your first mortgage, and what Loan-to-Value (LTV) percentage the lender offers.

For example, your home is worth $200,000 and you still owe $125,000 on your mortgage:
$200,000 x 80% LTV = $160,000
$160,000 - $125,000 = $35,000 (the maximum loan amount you might be offered)

Should I get a loan or line of credit?

If you want the money for a one-time expense (like a remodeling project), a home equity loan is probably right for you. You will get your money, pay for the expense, and start repaying the loan right away.

If you’re planning to make a payments over a period of time and don't need a lump sum right away, or you want a safety net ready for emergencies, a HELOC might the better option because you’ll only pay for the money you take out.

Besides the rate, how can I make sure I'm getting a good deal?

First, make sure you understand the upfront fees that are involved. They usually won't be as high as the fees you paid on your first mortgage, but still can be significant.

Second, read the fine print. Is the interest rate an introductory one? Is the rate after the introductory period still reasonable? Are you required to make a certain number of withdrawals on your HELOC? Is there a cancellation or annual fee?

The more research you do, the better your loan deal will be. Call us at (540)982-3931 to see how our EasyEquity Options compare.