There are many advantages to being a homeowner. Not only is your home a significant and valuable investment, but it also allows you to leverage your home’s equity when you need to borrow funds. Whether planning home improvements, making energy-efficient upgrades, dealing with an emergency, or making a special purchase, tapping into your home equity can be a smart financial move.
One of the key benefits of homeownership is the ability to access this equity through financial products like home equity loans and home equity lines of credit (HELOCs). Each option has its own set of features and benefits, making it essential to understand the differences and determine which one is best suited for your needs. Let’s explore the ins and outs of home equity loans and
HELOCs and make the most of their home equity through home equity loans and lines of credit (HELOC).
What is a Home Equity Loan?
A home equity loan, often called a second mortgage, allows you to borrow a lump sum of money based on the equity you have built up in your home. At Field & Main Bank, you may be able to borrow up to 90% of your home’s value. To give you an idea of your home’s value or the equity in your home, you can calculate it by subtracting the amount you owe on your mortgage from your home’s current market value.
For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity. You can borrow up to $90,000 through a home equity loan if you qualify.
How Does a Home Equity Loan Work?
The process of obtaining a home equity loan is like applying for a mortgage. You will need to submit an application. Here’s what you’ll need to apply for a home equity loan.
The bank may require a new appraisal and closing costs can be involved depending on the loan type.
Pros of a Home Equity Loan:
- Fixed interest rates ensure that your monthly payments remain consistent.
- Interest rates are typically lower than credit cards and personal loans, making a home equity loan a better option for big purchases.
- You can borrow larger amounts compared to personal loans, depending on your home equity.
Cons of a Home Equity Loan:
- Failure to repay the loan could put you and your home at risk of legal action.
- It adds an additional expense on top of your primary mortgage.
- If your home value drops, you could have negative equity.
- Interest paid on a HELOC might be tax-deductible, consult your tax advisor.
What is a Home Equity Line of Credit (HELOC)?
A home equity line of credit (HELOC) is a revolving line of credit secured by your property. You can draw as little or as much as you need, up to your approved credit line, and you pay interest only on the amount that you draw. A HELOC is nice to have in case of an emergency for large, unexpected expenses.
How Does a Home Equity Line of Credit Work?
Like other home loans, you must submit an application for a home equity line of credit, possibly have your home appraised, and close on the line to receive your funds.
Once your line is closed and funded, instead of receiving a lump sum, you have access to a revolving credit line. Much like a credit card, you can draw funds as needed, and as the funds are paid back, they are available to use repeatedly. A HELOC from Field & Main Bank is typically valid for up to 10 years, providing a flexible funding option. You are not penalized for not using it, and there is no annual fee. The application process and qualifications are similar to those of a home equity loan, and Field & Main Bank offers a no-closing cost for HELOCs.
HELOC Pros:
- No closing cost option.
- As you repay the borrowed funds, your credit line is replenished.
- You only pay interest on the money you draw.
- Interest paid on an HELOC might be tax-deductible, so consult your tax advisor.
HELOC Cons:
- Interest rates are variable and can fluctuate with economic conditions.
- Once the draw period ends, you must pay off the remaining balance, and the line cannot be extended without reapplying.
When to Consider a Home Equity Loan or Home Equity Line of Credit
A home equity loan and a HELOC can be used for various purposes. However, the best choice depends on your specific needs and financial situation.
When a Home Equity Loan Might Work Best
- Fixed Expenses or Lump Sum Needs: Ideal for major renovation projects, significant purchases like a vacation or wedding, or consolidating debt without the temptation of a revolving credit line.
- Predictable Payments: If you prefer set monthly payments, a home equity loan’s fixed interest rate offers stability.
When a HELOC Might Work Best
- Variable Expenses: Suitable for ongoing projects or home upgrades where the total cost is uncertain.
- Emergency Cushion: Provides a flexible funding option for unexpected expenses.
Everyone’s financial situation is unique, and choosing between a home equity loan and a HELOC isn’t a one-size-fits-all decision. The best choice for you will depend on your individual needs, goals, and financial circumstances. For some, the predictability of a fixed-rate home equity loan might be more appealing, especially if they need a lump sum for a significant expense. Others might prefer the flexibility of a HELOC, which allows them to draw funds as needed, making it ideal for ongoing projects or unpredictable expenses. Understanding your financial objectives and assessing your comfort with variable vs. fixed rates, repayment terms, and borrowing limits will help you determine the right option for leveraging your home’s equity.
Apply for a Home Equity Loan or Line of Credit Today
Ready to leverage your home’s equity? Field & Main Bank offers competitive rates and flexible terms to meet your financial needs. We are your community bank and local home lender in Henderson, Lexington, and Cynthiana, Kentucky, and Evansville, Indiana. We are here to help guide all your financial needs today, tomorrow, and wherever you are. When it comes to home loans, our goal is 30 days from application to funding your loan/line. Whether you’re looking to do a large renovation, a wedding, or take a dream vacation, we are here to help you with every step along the way.
To apply for a home equity loan or home equity line of credit, fill out our online application, visit one of our branch locations in Western Kentucky and Central Kentucky, and Southern Indiana, or call us at 1-888-831-1500 with questions.
