Home equity loans and home equity lines of credit (HELOC) can provide borrowers with up to 125 percent of their home's appraised value to use as they wish. A home equity loan is a lump-sum amount that's repaid over an arranged term at a predetermined interest rate. A HELOC, on the other hand, sets a loan ceiling and lets borrowers withdraw up to the maximum amount as revolving credit with variable rate interest. Both loan products come with a risk, since the borrower uses their home as security. At the same time, used wisely, they can be used to great advantage now and for the future.
Home Equity to Invest in Your Future
A home equity loan that arrives as a lump amount may be useful for those who want to start or upgrade a business or pay for career training. For those who already hold college degrees, a post-baccalaureate certificate can bolster long-term earnings and lead to advancements in the workplace. A homeowner may also want to change careers entirely, or write a tuition check for a loved one.
Many Americans take out home equity loans or HELOC to pay for home improvements to build home value or to modify their homes if they plan on remaining in them for a long time. This kind of home investment is common when there's a good equity cushion and low interest rates offered by lenders. Not all home improvements yield a sound return of investment. Get ideas on high-ROI improvements at the Cost vs. Value report culled annually by Realtor Magazine.
The Big Event and a HELOC
This is the season of the big event. It's not too late, however impulsive, to borrow for the graduation or a big fat wedding. A HELOC works like special checking account or credit card, allowing consumers to draw what they need up to 10 years, pay monthly interest (usually variable rate) on the amount borrowed, and then repay the principal at the end (from 10-20 years). Beware, though, some HELOC products require an immediate payoff after the draw ends, rather than relying on an extended repayment plan. And on another cautionary note: getting hooked to revolving credit secured by a nest egg can be dangerous!
Pitfalls to Avoid
Generally speaking, consumers shouldn't use a home equity loan to buy a car or play the stock market. With the former, there may be rates on car loans as low as 1.9 percent that won't put your home in jeopardy should payments become impossible.
When it comes to using home equity to buy securities, consumers have to realize that the money they're putting into the Wall Street slot machine isn't theirs to lose. If an investment tanks or otherwise goes haywire, it's farewell house. The National Association of Securities Dealers is hammering down on brokerage firms that recommend using a home equity loan to play the market.
How Much Can You Borrow?
A quick way to estimate the total amount of a home equity loan or HELOC and monthly payments is to use LendingTree's Home Equity Loan Calculator. Just enter the current appraised value (based on the zip code), the total owed on the home (mortgage and liens), and self-reported credit score. The calculator returns the total equity applied to a home, and estimated monthly payments.
From there, consumers can round up multiple offers on customized home equity loans or HELOCs from competing lenders, finding the best options to borrow for immediate needs or for the future.
Some Home Equity Basics
Borrowers should know that equity on a home is a moving value, with variables based on market conditions, appraised valuation, and individualized terms on their mortgage. For some, it's more prudent to increase equity before using their home as security while they're still paying on it. For example, a homeowner may want to pay down the principal ahead of monthly payments to build equity or shorten the mortgage term to pay it off entirely. That may mean putting off plans to use a home equity loan or HELOC while your monthly house payments increase and the equity builds. Those who want the loan right away may find a HELOC the best option since you only borrow exactly what you need.