Home Equity Loans and Lines of Credit FAQ
A HELOC is a credit line that is directly tied to your home’s equity, which is the portion of your home you own based on payments to your mortgage principal. A HELOC provides ongoing access to those funds, meaning you can use it all at once or in smaller increments over time. Monthly payments are based only on the portion of the line of credit you actually use. Plus, the interest you pay may be tax deductible (consult your tax adviser).
This can be confusing to most because both Home Equity Loans and Home Equity Lines of Credit share some similarities, such as:
- Both loans are secured by the equity the borrower owns in his/her home.
- Both loans may be referred to as a second mortgage.
- Both loans’ interest may be tax-deductible (consult your tax adviser).
Home Equity Loan
- A fixed amount of money based on your home’s equity over a fixed amount of time.
- A fixed rate of interest, typically.
- Single lump-sum dispersal with no option for the borrower to obtain additional funds.
Home Equity Line of Credit
- A revolving credit limit based on your home’s equity.
- The option to draw funds at any time, and multiple times, over a predefined time period.
- The ability to draw money as he/she needs it, in any increments.
- Funds that are instantly available for use again, as soon as the principal is repaid.
- A variable rate of interest that may fluctuate over the life of the loan.
In short, a Home Equity Loan or Home Equity Line of Credit are both very flexible and may be used for most any occasion, including:
- Home improvements (large and small)
- Debt consolidation
- College tuition and expenses
- New automobile
- Automobile refinance
- Recreational vehicles (boats, motorcycles, ATVs)
- Unexpected expenses - medical bills, new furnace, etc.
It's also worth noting that the interest you pay on a Home Equity Loan or Home Equity Line of Credit may be tax deductible (consult your tax adviser).
Here are some basic things to consider when evaluating if a HELOC is right for you:
- You must have lived in your home long enough to build equity.
- HELOCs are generally capped at 85 percent of your home’s maximum value.
- Your approval and rates are subject to income level, job security, credit history and home value.
- You will only have to make payments based on funds you use, not the full amount available.
- Your loan-to-value (LTV) ratio is a risk assessment calculation for home equity loans. The higher your LTV, the riskier your loan, which may lead to higher interest rates or loan insurance.
- Remember: In the event of a default, your home could become collateral in paying off the loan.
There are multiple ways in which bank customers may access their Home Equity Line of Credit funds.
- Equity Access Card - Funds may be accessed via debit card transaction, using the Equity Access card associated with your HELOC.
- Online - Simply log in to your online banking account and easily transfer money from your Home Equity Line of Credit directly into your checking or savings account.
- Phone - Customers may call the bank to request that available funds be transferred into your checking or savings account.
In short, customers have unlimited access up to their approved credit limit.
Loan to value (LTV) is a ratio drawn by comparing the amount of money a homeowner owes on his/her first mortgage versus the home’s current appraised value. Borrowers with higher LTVs usually pay a bit higher rates of interest because they are generally seen as a higher risk than those with comparatively lower LTVs.
LTV is typically calculated as:
LTV = Mortgage Amount / Appraised Property Value