Borrowing Against The Value Of Your Home

Borrowing Against The Value Of Your Home

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Home Equity Loan or Line of Credit?

If you are a homeowner with very good or excellent credit and have significant equity built up in your home, you can use your house to fund your home improvement projects. Granted, home values have declined over the past year or so – in some cases sharply – leaving some owners with little equity left. Then again, if you have owned your home for many years you may no longer have a mortgage or owe less than half of what your home is worth.

home contractorFor the homeowner whose job situation is precarious, finances in disarray or struggling to make ends meet, neither a home equity loan (HEL) or a home equity line of credit (HELOC) should be considered right now. You will want to get your finances in order first before pursuing anything that could put your home at risk.

HEL v. HELOC

Exactly what are the differences between HEL and HELOC?

If you choose to go With a HEL, you will receive a lump sum of money and have a fixed monthly payment that you pay off over a predetermined time period. For example, if you borrow $50,000 you’ll get all of that money at one time and can use it as you want. You’ll have to pay your loan back in a certain amount of time and at a specific interest rate which can fluctuate if you choose an adjustable rate loan.

A HELOC works a bit differently as it is treated as a type of revolving credit much like a credit card. You can withdraw funds as needed for up to a predetermined limit. Usually, there is a minimum payment due each month, with the option to pay off as much of the line as you want at any time. So if you are approved for a $50,000 line you only pay make payments on the portion of the amount borrowed.

With either option, the amount you may borrow is based on several factors including your income, debts, the current value of your home, how much you still owe on your first mortgage and your credit history.

Additional Loan Attributes

Some more points to consider before choosing either option:

  • With a HEL and a HELOC you may have to pay an application fee or an annual fee and in some cases closing costs. However, some lenders will cover all or portion of these costs making it worthwhile to shop around.
  • With a HELOC you can draw on your funds for a certain amount of time, usually from five to twenty years before it is converted into a loan requiring a fixed monthly payment and loan term. From the start, an HEL has a set term which can be as long as thirty years.
  • With a HELOC you may be able to borrow up to 100% of the value of your home minus other debts (mortgage) against it. The days of allowing buyers to borrow above that amount are just about over, with few lenders willing to be exposed to that extent. Many HEL lenders will consider similar lending terms too.

What To Do With The Money

Naturally, taking out an HEL or HELOC means that you’ll want to put that money to work. Our homes are our greatest asset, therefore using those funds to cover needed repairs and updates makes a lot of sense.

To that end, we’ll be covering a number of home improvement tips over the coming months on SayEducate.com, projects you can do yourself, farm out to a service contractor or both. Check out this bi-weekly tip to help you save money around the home.

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About Author

Matthew C. Keegan

Matt Keegan is a freelance writer and editor as well as publisher of "Matt's Musings", his personal blog. Matt covers campus, consumer, business and financial topics on various websites and blogs, and has been published in the "Houston Chronicle", "Sam's Club Magazine" and "Wisconsin Golfer".