Financial Tips / Mortgage Advice

Home Equity Financing 101

Thinking of consolidating debt? Need to fund a college education? Entertaining a home improvement project? Looking to finance a “bucket list” vacation? If you are a homeowner, the financial resource may literally be all around you – home equity financing allows the applicant to borrow against the equity of their home by using the house as collateral to obtain a home equity loan or line of credit.

What’s the Difference? HELOAN vs. HELOC

Both a home equity loan and line of credit are useful, but are also very different. A home equity loan (HELOAN) is a fixed rate product with a set term of fully amortized principle and interest payments. A home equity line of credit (HELOC) is an adjustable rate vehicle with variable interest rates and payments depending on market conditions. A home equity line sometimes even allows for “interest only” payment arrangements. Home equity fixed mortgages often start their terms with higher interest rates than their home equity line counterparts.

How to Choose?

A home equity fixed rate loan can be ideal for projects or events that have a determined expense. For example, if a roof renovation is needed, the homeowner can do research in advance and set a budget. The homeowner can then apply for a loan in that amount. If a borrower applies for a $10,000 home equity loan, the debt is repaid in fixed installments of principle and interest payments over a term of 5, 7, 10, or even 15 years. The length of the term, size of the loan, amount of residual equity and credit worthiness determine the interest rate.

By contrast, a home equity line of credit may be appropriate for short-term financing that requires flexibility such as ongoing renovations or caring for an elderly parent. Since a HELOC establishes a limit, a homeowner can choose to borrow against it at any time and for any sum, up to the limit. Repayment is determined by the outstanding balance. Should a borrower secure a $50,000 credit line but only borrow $5,000, he/she is only obligated to repay on the $5,000 balance owed, leaving $45,000.00 to draw on in the future as needed or desired.

It should be stressed that a variable rate mortgage can result in higher payments in a rising interest rate environment – even with capped interest rates known as a ceiling. While homeowners have benefitted from accommodating low interest rates in recent years, the market trajectory seems to be gradually moving higher.

How do They Work?

Ultimately, the amount of the loan or line is determined by the value of the property, and the value of the property is determined by an appraisal or a similar valuation process from the lending institution. Both HELOCS and HELOANS are both mortgages that use the subject property as collateral. They usually take “second position” behind an already existing, primary mortgage.

Application and closing charges for home equity financing are very inexpensive compared to primary mortgages. The mortgage application process associated with obtaining home equity financing is usually much shorter than that of a primary loan.

Nearly all lenders will mandate that a certain amount of equity remain after a home equity product has been established. To protect their investment, and that of the homeowner, many lenders prefer that a homeowner maintain at least 20% of property equity even after a second mortgage has been opened (referred to as Combined Loan-To-Value, or CLTV).

Right for You?

Home equity financing allows you to take advantage of what you’ve already invested in your home. Univest offers both home equity loans and lines of credit. Contact us at 877-723-5571 or mortgages@univest.net for more information. We can customize home equity financing consistent with your specific needs today!

 

Univest Bank and Trust Co. is  an Small-House-Black-Logo_vs2_21x17 Equal Housing Lender, Member FDIC and an Equal Opportunity Lender.


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