As a homeowner, you should have gained some equity in your home since living there and paying your mortgage down. Have you ever considered using this equity to finance some of your needs if you don’t have the cash flow?
A home equity loan or line of credit are two ways to get the necessary funds to finance an addition to your home, start your own business, consolidate credit card debt, or finance another significant need. However, you don’t want to think of it as your ATM … that could be dangerous!
You should always consult a financial advisor before considering the best course of action to take.
Here’s a brief rundown:
What’s a Home Equity Loan?
The equity in your home is the difference in the home’s market value and what you still owe on it. For example, a home worth $250,000 but has a $200,000 mortgage balance has $50,000 in equity.
Therefore, a home equity loan (or term loan) allows you to take a loan amount based on your home’s equity plus other factors such as your income.
This loan is sometimes called a second mortgage. Upon the loan’s approval, you get a lump sum and must repay a certain amount each month subject to a fixed interest rate, just like a first mortgage.
The loan length is usually shorter than first mortgages – it can be from five to fifteen years.
What’s A Home Equity Line of Credit (HELOC)?
With a “line of credit,” you are approved for a specific credit limit based on your home’s equity. This loan functions almost like a credit card in which you can withdraw money when you need it over the lifetime of the loan, such as ten years. You only pay interest on the amount you withdraw and not on the total amount approved.
Credit lines have variable interest rates rather than fixed rates, so your repayments can change depending on the interest rate when you withdraw money.
You should carefully review all requirements, fees, penalties, and how often the interest rate is adjusted since HELOCs can vary depending on the lender.
Advantages of These Loans
• You have the freedom to use the funds for whatever your need or needs may be, unlike student and auto loans that are very specific.
• Interest rates are usually much lower than credit cards.
• Interest paid on your loan is tax-deductible.
• Additional fees and closing costs can be rolled into the actual loan amount.
Disadvantages of these Loans
• If you can’t pay back the loan, you risk losing your home.
• You must pay back the loan if you move, so have an idea of your plans. (You can get a new loan to pay back this loan.)
Other Important Factors
· Get a realistic idea of your property situation. If you bought your home at a good time and it’s located in a strong market, you should have substantial equity. If you’re underwater on your mortgage, your home is not a candidate. First and foremost, take the time to review your particular neighborhood and your own home to see if these loans are an option for you.
· A lender will look at your complete financial picture. It’s not just your home’s equity that a lender will consider. They want to make sure you can repay the loan (and you don’t want to lose your home!). As part of the approval process, a lender will review your income, debts, other financial obligations, and your credit history.
· Ask yourself “why” you are taking out one of these loans. You should NOT use this loan for everyday expenses on clothing, vacations, or gifts but rather for a particular project or need. Taking out a loan to have access to money for frivolous expenses is not wise.
· Consult with several advisors. Your situation is unique to you, so get advice from several sources — talk to me about the housing market, a lender about the implications of taking on more debt, a financial advisor about your larger financial picture, and a CPA about how this will impact your tax situation.
Please let me know if you have any questions about whether getting a home equity loan or line of credit is correct. I can also help let you know how much your home is worth to know how much equity you might be able to use. Plus, I have great lenders who can help you through the process of obtaining a line of credit.
Having a line of credit is not suitable for everybody. Be sure to reach out to me to discuss whether it’s a good option for you and how much equity you have, and I can recommend lenders who can help you if you choose to move forward with this type of loan.
I'm Tehane, a local realtor helping locals buy, sell, and stay local in Honolulu Schedule a conversation, and let's talk about your current situation and where you want to be. Then, let's create a plan to get you there. Every journey begins with the first step!
BHGRE Advantage Realty
4211 Waialae Avenue, Box 9050
Honolulu, HI. 96816