Understanding How Home Equity Loans Work

It's important to know the basics, especially if it's your first time.

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We'll help you understand your options.

Home equity loans aren't as complicated as getting a mortgage, but they can still be confusing.

What is home equity?

Your home's equity is the difference between what you owe on your mortgage and what your home is worth. For example, if you have a home worth $150,000 and you owe $100,000 on your mortgage, your equity is $50,000.

What is a home equity loan?

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, a home equity loan is available to spend how you please.

Home equity loans usually come in two forms: a fixed-rate loan (also called a second mortage) or a line of credit.

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

Home equity loans are one-time loans approved for a fixed dollar amount, have a fixed interest rate, and a fixed repayment term (sometimes 5 or 10 years).

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 Instead, you can withdraw money as you need it and only pay interest on the money you've withdrawn.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.

We also offer a hybrid option that lets you use your line of credit, but lock in your rate at any time. This can protect you from your payments going up if your variable rate rises.

Is using my home's equity a good idea?

It always depends. But your home is probably your biggest asset. If you need funds, it's a great option for borrowing at a lower interest rate than a personal loan. Of course, you don't want to use your equity for small, temporary expenses. Instead, think of it as a flexible option for college expenses, home repairs or remodeling, or expensive emergencies.

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 a flat amount of money and you're sure you'll won't need another home equity loan in the future, a home equity loan is an option for you. You'll get your money and start repaying the loan right away.

If you want something more flexible that you can use for years into the future, a HELOC is the better option. You'll only pay for the money you use and you won't have to reapply for a new loan every time you need funds.

Our HybridHELOCk option makes a line of credit even better, because you keep the flexibility of your HELOC, and you can lock in your rate to keep the APR and your payment steady.

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

First, make sure you understand any fees and closing costs that are involved. They usually won't be as high as the ones 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.

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