An In-Depth Look at Home Equity Loans
At Kensington Bank, we offer a number of loans for various purposes and times in your life. Home Equity Loans or Home Equity Lines of Credit allow you to borrow money using your home’s equity as collateral. Let’s take a look at the nuances of this type of financing.
WHAT IS A HOME EQUITY LOAN?
A Home Equity Loan is useful if you own your home and have a need for available money, whether it’s for home renovations, unexpected costs like taxes due, or school tuition. The amount you’re approved for will be based on your home’s value, what you owe on the home, and your credit profile.
We can help you take out a Home Equity Loan or Home Equity Line of Credit—assuming your home is worth more than you owe on it (positive equity). For example, following the housing crash of the Great Recession, home prices fell, meaning that many people owed more on their home than it could be sold for. The good news is that “rising home values in recent years are putting more equity in borrowers’ hands, while a gradually stabilizing economy is giving lenders more confidence to lend,” according to Kirk Haverkamp on credit.com.
WHAT’S THE DIFFERENCE BETWEEN A HOME EQUITY LOAN AND HOME EQUITY LINE OF CREDIT?
There are two types of home equity debt, and both are sometimes called “second mortgages” since they are secured by your property and in a second lien position behind your pre-existing first mortgage.
A Home Equity Loan or HEL is a one-time lump payment that you pay off over time. These generally have a fixed interest rate and the payments don’t change from month to month. These are usually booked for a shorter term than a traditional mortgage loan.
A Home Equity Line of Credit or HELOC is a line of credit using your home as collateral, meaning that you will be approved for a certain amount of credit which you can borrow against. Instead of receiving one lump amount, you will receive a line of credit similar to a credit card. Say you secure a $10,000 line of credit from Kensington Bank, and you immediately use $7,500 to remodel your bathroom. You only borrow the amount you need, meaning you would still have $2,500 in available credit should something more come up. Find more details on HELOC loans and whether this makes sense for you.
PROS AND CONS
Home Equity Loans may have a lower annual percentage rate than a credit card, interest payments may be tax-deductible, and they can help you achieve large financial projects.
However, keep in mind that Home Equity Loans are still a type of mortgage, secured by your home. If you fail to make payments on your Home Equity Loan, your home could be foreclosed upon. It can be a big decision to open this type of loan, and we are here to help you navigate the waters.
We know that local home ownership is vital for strong communities—and we’re proud that our customers come to us for direction as well as financial services. Contact a Kensington Bank loan officer to get started or learn more.