Get to Know MAFCU
Is a Home Equity Loan or Home Equity Line of Credit Right for You?
January 12, 2016
By: Stacy Yu
Owning a home can be a wise financial investment, as well as a safety net. Through Home Equity Loans and Home Equity Lines of Credit (HELOC), owners have a resource to access money using their home's equity*. These funds can be used for a variety of reasons such as large purchases, college tuition, debt consolidation or in the event of an emergency. Both Home Equity Loans and HELOCs are secured loans where home owners can borrow money from a lender using their home as collateral.
So, how do you know if a Home Equity Loan or HELOC is right for you?
While Home Equity Loans and HELOCs both utilize home equity as a fund source, there are differences in how these loans are distributed.
Home Equity Loans
In a Home Equity Loan, borrowers receive a fixed, lump sum of money upfront. Similar to a mortgage, pay back for this loan is done in equal monthly installments for a pre-determined period of time. Monthly payments are based on principal plus interest. Interest for home equity loans are typically fixed, and the annual percentage rate (APR) includes any additional points or financing charges that may apply.
A Home Equity Loan may be right for you if:
You are planning big home projects or need to make a large payment in the foreseeable future
You have good credit
You have a fluctuating income, where payment planning is essential to successfully managing your monthly cash flow
Home Equity Lines of Credit (HELOC)
HELOCs work like your checking account or credit cards. Borrowers receive a revolving line of credit that can be used as needed over a designated period of time. Payments are based on the amount utilized, and interest rates are often based on the prime rate index and are variable - opposed to a fixed interest rate. Tax benefits may also apply.
HELOCs are a great option if:
You have a series of smaller home repairs and upgrades that need to be done in the future
You have a stable income and can bear any fluctuation in pay back amounts based on the variable interest rate
For many HELOCs, upfront closing costs, similar to mortgage re-financing closing costs, can apply. However, for MAFCU HELOCs, MAFCU will pay the closing cost fees for HELOCs open for more than 3 years.
To find out if a Home Equity Loan or HELOC is right for you, contact your local MAFCU representative, or visit https://www.mafcu.org/accounts.cfm/take-a-loan/home-equity-home-improvement.
*Home Equity = Market Value of Home – Current Mortgage