What Is A Home Equity Line Of Credit & How Does It Work?
A home equity line of credit, also known as a HELOC, is designed to let you access the equity in your home.
You can use this line of credit for several reasons that benefit you financially. A HELOC carries a lower interest rate than many other loans and credit options, making it more affordable to pay back.
With the flexibility of a home equity line of credit, you can take advantage of the equity in your home to finance any financial responsibilities or desires.
How To Calculate Your Home Equity
The prerequisite of getting a home equity line of credit is having equity in your home.
It’s a simple process to determine whether you have equity and how much you have.
Determine your home’s value: You can find your home’s value by using an online real estate site such as Zillow, Redfin, or Realtor.com to get an estimate of your value. If you want a more accurate value, talk to an experienced realtor.
Determine the balance on your mortgage: Next, look at your mortgage statement to see your payoff balance.
Subtract your home’s value from your mortgage balance: For example, if your home has a value of $350,000 and your mortgage balance is $300,000, you have $50,000 in equity.
What is a Home Equity Line of Credit?
A home equity line of credit is similar to a credit card. It allows you to take out a line of credit against the equity in your home and use it for whatever you choose.
For example, if you secure a $50,000 home equity line of credit, you don’t have to take it all out at one time. Instead, you can take out $10,000 for home repairs and $5,000 to pay off high-interest debt.
You’re only responsible for paying back the amount you borrow, not the entire $50,000 line of credit. Typically, you have a set draw period in which you can access your line of credit as much as you want or need to.
Some lenders will allow you to borrow 100% of your equity, while others will loan you a percentage of your equity, so you want to check with your lender for the details.
HELOC vs. Home Equity Loan
Another common way to access your home’s equity is with a home equity loan. A home equity loan is similar to other loans you’d get, such as an auto loan. It uses your property as collateral and provides you with a loan based on your home’s equity. Again, some lenders will allow you to borrow the full amount, while others will limit the amount you borrow.
When you get a home equity loan, you receive the full amount you borrow in a lump sum and are responsible for paying that amount back in equal payments over the agreed-upon term.
A home equity loan offers lower interest rates and more extended repayment periods than many other loans, making it a sound option.
The primary way this is different from a HELOC is that you get a lump sum instead of only borrowing what you need over your draw period.
How To Gain Access To Your Home Equity
Whether you need to access your home’s equity to fund a home renovation, pay off expensive debt, or take care of an emergency, there are a few ways you can use your equity.
Two options were already mentioned above, but there is one additional primary option:
HELOC: The home equity line of credit is similar to a credit card in that it allows you to obtain a line of credit and only borrow what you need. You are then solely responsible for paying back the amount you use.
Home equity loan: When you get a home equity loan, you receive the amount you borrow against your home equity in a lump sum. You are then responsible for repaying that amount in equal payments throughout your repayment period.
Cash-out refinancing: The third primary option is cash-out refinancing. This is when you get a new mortgage for more than you currently owe. At closing, you are presented with a check for the difference that you can use to “cash out.” Cash-out refinancing differs from the other two options in that you are paying off your initial mortgage and getting a completely new one. The first two options are second mortgages taken out on your property.
Is a Home Equity Line of Credit For You?
You can use a home equity line of credit to access your home equity, yet only borrow the money you need at any given time. If you’re considering using your home’s equity to cover your financial needs, we invite you to learn more about a home equity line of credit.
At GHS Federal Credit Union, we offer a five year draw period and a 20-year repayment term with affordable non-variable interest rates.