Make the Most of Your Home’s Equity
Saturday, May 02, 2015
What is Home Equity?
“Your home’s equity is the difference between what you still owe for your home and what your home is worth,” explains Auen. For example, if the appraised value of your home is $200,000 and you owe $150,000 on your mortgage, your home’s equity is $50,000. Auen points out that your home’s value can change. “Improvements to your home or your neighborhood can affect the appraisal, which means it is possible for your equity to grow.” If you are borrowing against your home’s equity, your lender usually orders some type of appraisal, which typically costs between $300 and $400. At Southbridge Savings Bank the appraisal fee is refunded to you after your closing.
Home Equity Loan
A home equity loan uses your home’s equity for cash, providing you with a lump sum of money. Auen clarifies, “If you’ve heard people talk about a ‘second mortgage,’ they were likely talking about a home equity loan.” Most customers can finance up to 90% of their home’s value (minus their first mortgage balance). The interest paid on the loan may be tax deductible depending on your particular tax bracket. Auen notes, “What a lot of people love about a home equity loan is that their monthly payments stay consistent because they’re borrowing a specific amount of money, for a specific period of time, at a fixed interest rate.”
Home Equity Line of Credit
Unlike a Home Equity Loan, a HELOC is not given in a lump sum. “Think of a HELOC as a credit card, where the credit limit is based on the equity in your house,” says Auen. Like a credit card, a HELOC is a revolving line of credit that continues as you make regular payments; a HELOC can be preferable to a credit card, however, because the credit limit is usually higher, the interest rates are lower, and there are no annual fees. Auen adds, “Since the HELOC is based on the home’s value, it’s easy to be pre-approved for a pre-determined amount.”
Deciding between a home equity loan and a HELOC is a personal choice for each borrower. “It comes down to which one is a better solution depending on your borrowing needs,” says Auen. “A home equity loan provides a consistent bill, but a HELOC gives you ongoing access to funds. Which matters to you more?”
Auen advises homeowners to research their home’s value and investigate different lenders’ interest rates before making a decision. Homeowners in Central Massachusetts have the advantage of being able to turn to a neighbor—the NextDoor Lending Team at Southbridge Savings Bank—for expert advice. Led by Auen, the NextDoor Lending Team takes pride in making sure its borrowers are well informed and confident about the borrowing process. “Helpful lenders provide online resources to educate their customers. Tools such as our online Home Equity Lending Calculator make it much easier to plan and budget projects.”
Ultimately, how you choose to use your home’s equity is up to you. You may decide to increase your home’s energy efficiency with new windows or insulation; perhaps you want to spruce up your home’s curb appeal; maybe you and your spouse can finally make plans to take the honeymoon you never had! The possibilities are certainly fun to consider, and you may have thousands of dollars worth of equity at your disposal.
This article was written by Southbridge Savings Bank as part of an ongoing sponsored content series.
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