Your home can be a source of ready cash for remodeling or if you need emergency funds. The more equity you have in your home, the more funds you will have access to borrow. “Homeowners have a great deal of flexibility when it comes to using the equity in their home when making large purchases, home improvements, or even having money available for an emergency,” says Crystal Lautenbach Assistant Vice President, State Bank of Cross Plains.
Below is a brief explanation of financial options that are available to you when making decisions on how best to use the equity in your home. Note that your bank or mortgage company can provide you with more specific details for your unique situation.
The first step in accessing the equity in your home is to discover which kinds of financial products you have available to you. Most homeowners will have access to two type of funding options: a Home Equity Line of Credit or HELOC, and a second mortgage. Each has unique advantages for the consumer depending on your needs.
Home Equity Line Of Credit (HELOC)
The Home Equity Line of Credit or HELOC is a very useful financial tool in that it can be set up without you using the money immediately. Money can be drawn from your HELOC as needed. You can draw the funds by using a check from the HELOC account or through an Internet banking service connected to your HELOC account. You can transfer money from one account to another with the click of a mouse! The advantage of using a HELOC is that you only pay interest on the amount you actually draw. Homeowners can pay back the full amount whenever it’s most convenient for them.
The key elements you need to know about HELOC’s include:
♦ A HELOC is a revolving account, which means you can borrow and pay back the funds borrowed over time.
♦ Interest rates are variable meaning that they are tied to the prime rate.
♦ Paying back the principal is at the homeowner’s discretion, often being paid in a lump sum.
Second mortgages are another type of financial tool where you can use equity in your home to borrow funds. It is an excellent tool for consolidating debts, such as credit cards. Debts such as auto loans, contractor loans or any other bills that are subject to higher interest rates can be consolidated at a lower interest rate and into one payment to help reduce monthly bills. The difference between a HELOC and a second mortgage is that a HELOC is a revolving product. The money is made available when needed and has required monthly interest payments based on what amount of money is borrowed. A second mortgage is paid out in full at the time the loan is taken out and the borrower makes monthly payments on both the principal and the interest.
The key elements you need to know about second mortgages include:
♦ Second mortgages requires payment on a structured schedule, such as monthly.
♦ Typically you have up to 15 years to repay the second mortgage.
♦ A second mortgage is reassessed after a term of three, four, or five years in order to adjust the interest rate. The payback window, however, remains the same.
Positives and Negatives
HELOCs and second mortgages have both plusses and minuses. The interest that you pay on both types of financial products are tax deductible. This is a big advantage when compared to auto and college loans, neither of which are tax deductible. Conversely, although borrowing money from a HELOC or a second mortgage is relatively easy, you do need to pay back the money that you borrowed. For example, it may be a good idea to take out a HELOC or a second mortgage to pay off high interest credit cards, but if you continue to use credit cards, too, you will find yourself in a difficult financial situation having to pay off both the credit card and the HELOC or second mortgage.