The Benefits of a Home Equity Loan

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home equity loan benefits

A home equity loan is a type of loan where a homeowner can borrow against the equity in their home, which is the difference between the home’s market value and the outstanding mortgage balance. Equity in your home is calculated as the difference between your home’s value and your mortgage balance. Loans are secured against the equity value of your home.

Home Equity Loan Benefits:

With a home equity loan, the lender provides a lump sum of money to the homeowner, which is usually based on a percentage of the home’s appraised value, less the amount still owed on the mortgage. The loan is secured by the home and must be paid back over a fixed term, typically ranging from 5 to 30 years, with a fixed interest rate.

Homeowners can use the funds from a home equity loan for a variety of purposes, such as home improvements, debt consolidation, or other major expenses. The interest paid on a home equity loan may also be tax-deductible, which can provide homeowners with additional savings.

It is important to note, however, that taking out a home equity loan does come with risks, including the potential loss of your home if you are unable to make the payments. Before considering a home equity loan, homeowners should carefully evaluate their financial situation and ensure that they can afford to take on additional debt.

Home Equity Loan Compared to a HELOC:

A home equity loan and a Home Equity Line of Credit (HELOC) are both types of loans that allow homeowners to borrow against the equity in their homes. However, there are some key differences between the two:

  1. Repayment terms: HELOC is an open-end line of credit with a mortgage tied to your property with a draw period of up to 5 years (can draw, pay back, draw for 5 years).
    • Your ability to draw on the line of credit goes away if you choose not to renew the draw period after 5 years (can renew the draw period by refinancing the HELOC).
    • If a balance applies after 5 years, continue making the minimum monthly payment until the balance is paid in full and then the mortgage on the property is satisfied.
    • Minimum monthly payments are 2% of the outstanding principal balance and are due at the end of each month.
  2. Interest rates: The interest rate on a home equity loan is usually fixed for the life of the loan, whereas the interest rate on a HELOC is typically variable and may change over time.
    • Interest rate is variable tied directly to the prime interest rate. Interest can change quarterly on the 15th of January, April, July and October.
    • If the rate changes, your payments remain the same (if rate increases, more of your payment goes towards interest and if the rate decreases, less of your payment goes towards interest).
  3. Access to funds: With a home equity loan, the borrower receives a lump sum of money upfront, whereas with a HELOC, the borrower has access to a line of credit and can draw on it as needed.
  4. Costs: Both types of loans may have closing costs and fees, but the costs for a HELOC may be lower than those for a home equity loan.
  5. Tax implications: Interest on both types of loans may be tax-deductible, but there are some differences in the rules for deductibility. For a home equity loan, the interest may be deductible up to a certain limit, while for a HELOC, the interest may be deductible on up to $100,000 of the loan amount.

The choice between a home equity loan and a HELOC depends on the borrower’s specific needs and financial situation. A home equity loan may be a better option for those who need a large lump sum of money and prefer a fixed interest rate and repayment term. A HELOC may be a better option for those who need flexible access to funds over time and can handle a variable interest rate.

A HELOC is available to MMCCU members – even if you don’t have your mortgage with us. Contact our friendly team to learn if you qualify.

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