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
While a home equity loan and line of credit are both useful, they are also very different. A home equity loan (HELOAN) is a fixed-rate product with a set term of fully amortized principal 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 rate loans 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 principal and interest payments over a term of 5, 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 mortgage interest rates in general, including these home equity loans and lines of credit, have been accommodating in recent years, due to COVID and other economic factors, they remain subject to market conditions.

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 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.

To protect their investment and that of the homeowner, nearly all lenders will mandate that a certain amount of equity remain after a home equity product has been established. Consult your lender as this equity requirement varies.

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 Univest Home Loans at 877-723-5571 or mortgages@univest.net for more information. We can customize home equity financing to meet your specific needs today!

Univest Bank and Trust Co. is an Equal Housing Lender. NMLS #415882