You’ve heard of home equity loans but what exactly are they? Many homeowners use their home’s equity to finance home improvements, vacations or debt consolidation because it’s a pretty smart financial decision for two reasons: it’s relatively low cost and could give you a tax advantage.*
But let’s start with the most important question to understand: what is equity? If you’ve been paying your mortgage for more than a few years or used a large downpayment, chances are you have built up some equity. Equity is the difference between the appraised value of your home and the balance you own on your mortgage or mortgages (if you already have a second mortgage.) A quick way to estimate this is to find the value of your home either from your last tax assessment or a recent appraisal. Then find your latest mortgage loan statements and determine the outstanding principal. Don’t forget to add any second mortgage balances as well. Subtract the total amount you owe from the valuation and what is left is your equity, or the amount you actually own. In some cases Dane County Credit Union is able to lend you up to 100% of your equity!
What’s the difference between the two types of home equity loans?
Quite a bit, actually but both are based on the equity you already own in your home.
A Home Equity Line of Credit (or HELOC) is an adjustable rate mortgage which acts as line of credit secured against your home. The cash is available whenever you need it for a home improvement project, summer vacation or even debt consolidation. As you pay back the balance owed, the credit line remains open and is available to you again. Your interest is subject to change (quarterly) and is based on the prime rate plus or minus a margin. Check out this great promotional rate that also has NO closing costs. Here are the regular rates.
For example, let’s say you secure a HELOC from DCCU for $100,000. You can draw on that credit any time as needed. Maybe it’s $200 for the bathroom tile, or $500 for the pool, or $10,000 towards a new roof and insulation.
A Home Equity Loan is similar in that it’s based on the amount of equity you own in your home. But instead of a line of credit this is a one-time, lump sum payout with a fixed rate that you make payments on until it’s paid off in full, much like a car loan. The interest on home equity loans may be tax deductible but check with your tax advisor for current allowable limits. Other benefits of a home equity loan from DCCU include:
- Flexible repayment terms, and up to 15 year amortization schedule
- No annual fees, points, or prepayment penalty
- Quick turn around and approval
- Low closing fees
How do I get a home equity loan?
- Recent property tax bill with your property’s fair market value
- Balance statement on your first mortgage
- Copy of homeowner’s insurance policy
- Legal description of property (often found on current mortgage or deed copy)
- Copy of most recent pay stub (of if self-employed, two years of tax returns)
In your planning, remember that federal home equity loan regulations require a three-day “right of rescission” period (or right to cancel) before funds can be disbursed.
If you’re still not sure which product is right for you, call or stop by your local Dane County Credit Union branch in Madison today and a staff member will be more than happy to walk through the details with you.
*Consult your tax advisor for allowable limits and details.