Home equity is one of the greatest assets of homeowners, so it’s vital to understand how it works and how it can benefit you.
What is Home Equity?
Home equity is the amount of value in a property that is yours instead of the mortgage lenders. Home equity is calculated by subtracting the amount of mortgage balance that you have from the value of the property. For example, if your property is worth $400,000 and your mortgage balance is $300,000, your home equity is $100,000.
What is a HELOC?
If you ever need a large amount of money and have equity in your home, a Home Equity Line of Credit (HELOC) may be right for you. A HELOC is a revolving credit line, which works similarly to a credit card. Money can be withdrawn up to your maximum credit line, and can be reused as the balance is paid down and credit capacity restored. HELOCs may be used to pay for large-ticket items such as home repairs, vacations, medical bills, weddings, education and automobiles, or to pay off high-interest debt. HELOCs may be a better option over high-interest credit cards and personal loans.
Home Equity Loan-To-Value
Many lenders will loan up to 80 percent of the appraised value of your home minus the balance of the mortgage loan. Let’s say a home was appraised for $500,000. Eighty percent of that value equals $400,000. If the mortgage balance is $350,000, the maximum line of credit would be $50,000. Hawaii State FCU offers loans of up to 95 percent of the net value of your property.
HELOC Fixed-Rate Option
Most HELOCs have a variable interest rate, which fluctuates over time. Some lenders allow borrowers to “fix” the interest rate on a portion or all of their line balances, which protects them from rising interest rates. Hawaii State FCU offers Fixed-Rate Options as part of its Home Equity Line for 3-, 5-, 7-, 10-, 15- and 20-year terms. The advantage of taking a Fixed-Rate Option is that you know exactly what your monthly payment will be to pay the balance back over the term requested, which makes budgeting easier. Yet this provides the flexibility of having funds to redraw in the future to meet your other financing needs as you pay down the balance.
Interest on Home Equity Financing may be tax deductible only to the extent that it was used to buy, build, or substantially improve your home, and the home equity financing and first mortgage balance do not exceed $750,000. (Consult a tax advisor regarding the deductibility of interest.)
Before applying for a HELOC, reflect on your financial goals and understand the risks. HELOCs provide a lot of flexibility, but it is a new debt that must be paid in a specified amount of time. Online calculators can help you determine if a HELOC fits into your budget by estimating your line of credit and monthly payments. Also, ask your financial institution if there are additional expenses such as application fees or appraisal costs.
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