Home Equity Loan vs. Home Equity Line of Credit
Owning your own home is likely the biggest financial investment you will ever make. Along with the pride that comes along with being able to call a house yours, paying off your mortgage over time increases the amount of equity you have in the property.
As a Pennsylvania homeowner, you can leverage this equity if you ever need to borrow money for renovation projects or other large expenses. There are two ways you can do this: a home equity loan or a home equity line of credit.
What is Home Equity?
Home equity is the difference between what your property is currently worth and the amount of money you still owe on any mortgages or loans you have on the home.
To calculate your home equity, you’ll need to know a rough estimate for what your home value is today. You’ll then want to deduct your remaining mortgage balance from this amount. For instance, if your home is worth $400,000 and you still owe $280,000, your home equity is $120,000.
Home Equity Loans
What is a Home Equity Loan?
Also known as a second mortgage, a home equity loan is a specific type of loan that allows you to borrow money against the equity you have in your home. The total amount you can take out is based on the amount of equity you currently have, with most lenders allowing you to borrow up to 80% of the home’s appraised value.
Typically, home equity loans are lump sum payments, with a fixed rate and set repayment schedule, much like a traditional mortgage. As a result, the interest rates are often some of the lowest you’ll find of any loan type.
A home equity loan is a good option if you want to have a fixed monthly payment that’s easy to budget for and manage. You’ll make regular payments on both the principal amount and the interest until the loan is paid off.
How Does a Home Equity Loan Work?
The application process for a home equity loan is very similar to a standard mortgage application. You’ll need to provide proof of income, employment history and other financial data. Your lender will then run a credit check and organize an appraisal to determine your home’s value.
From there, the loan closing will happen and monthly repayments will start. Most home equity loans can last anywhere from 1 to 15 years.
Is a Home Equity Loan Tax Deductible?
If you’re using your home equity loan for renovations or other home improvement projects, the loan should be tax deductible. But it’s always best to consult with a tax professional.
When Does a Home Equity Loan Work Best?
Most homeowners will use their home equity loan to fund major renovations or upgrades on their home, like additions, appliance upgrades, or necessary repairs. Making changes to your home, both aesthetic and needed replacements, can add significant value to your property. It’s something to consider if you’re planning to sell within the next few years.
Home equity loans work best when you’re looking to pay for a one-time expense or have a specific amount you need to borrow, as this type of loan is a lump sum payment.
How Long Does It Take To Get a Home Equity Loan?
Depending on your financial circumstances, it can take anywhere from 2 to 6 weeks to open a home equity loan, from starting your application to closing on the loan.
Home Equity Line of Credit
What is a Home Equity Line of Credit?
A home equity line of credit, or HELOC, is a revolving line of credit that you can draw on at any time. Much like a credit card but without a physical card in your hand, HELOCs can be used as and when you need them, for any amount up to the maximum loan amount.
How Does a HELOC Work?
Like a home equity loan, the amount you can borrow with a HELOC is based on the equity you have in your home. But HELOCs allow you to take money up to this amount throughout the lifetime of the loan.
Like a credit card, once the balance is paid off, the amount you can borrow opens back up. You’ll also only pay interest on money you actually borrow, rather than the full loan amount.
Because a HELOC is more flexible, these typically come with variable interest rates and have a draw period of up to 10 years. Your monthly payment may fluctuate as interest rates change with the market, so it’s important to keep this in mind as you borrow from your line of credit and pay back any amount you’ve taken.
The process to get a HELOC is similar to a home equity loan, but there’s no specific closing date. There may still be closing costs associated, but you won’t make monthly payments until you draw funds from the credit line.
As with a home equity loan, if you’re using your HELOC funds for home improvements and renovations, the loan may be tax deductible. It’s always best to consult with a tax professional.
When Does a HELOC Work Best?
Since a HELOC is a revolving line of credit rather than a one-off lump sum, they’re best used for projects or expenses where you don’t know exactly how much you’re going to need or want a buffer for unexpected costs.
Smaller home projects like new appliances or furniture, adding a financial cushion to a bigger renovation, or starting a new business or side project are all areas that can be funded using a HELOC.
Similarly to a home equity loan, you can expect to get a HELOC within 2 to 6 weeks of your application being submitted.
What Are the Requirements to Apply for a Home Equity Loan or HELOC?
Home equity loan and home equity line of credit requirements will differ from lender to lender. On average, you’ll need to have at least 20% equity in your home, with a qualifying credit score of at least 620. You’ll also need to have a debt-to-income ratio of less than 47%.
Apply For a Home Equity Loan or Line of Credit
When you’re ready to apply for a home equity loan or HELOC, you can easily begin your application online with Citizens Savings Bank.
If you’re not sure which home equity option is right for you, stop by one of our Northeastern Pennsylvania locations to talk to our lenders. We’ll be able to guide you based on your plans for the funds and your current financial situation. Contact us today to get started.
Citizens Savings Bank has multiple locations throughout Lackawanna, Wayne, and Monroe Counties. For branch locations and hours, visit our website. We also have a Customer Support Team ready to answer any questions you may have. Call us today at 1.800.692.6279 or email [email protected]. Member FDIC. Equal Housing Lender.