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Home equity loans and home equity lines of credit (HELOCs) allow you to get immediate cash from the equity in your home. You can use this money for all kinds of major expenses, including home improvements, higher education, debt consolidation, small business investments, emergencies, and more.

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With home values ​​expected to skyrocket in 2022 and remain high in 2023, many American homeowners have a lot of equity. According to CoreLogic’s March 2023 report, total home equity increased by 7.3% ($1 trillion) in the fourth quarter of 2022 compared to the fourth quarter of 2021. Meanwhile, in 2022, the average U.S. homeowner gained nearly US$14,000. .

Reasons Not To Tap Your Home Equity

So, if you’ve seen your home increase in value, you may be thinking about taking advantage of your home equity. Two of the most common ways to do this are through home equity loans and HELOCs.

With a home equity loan – often called a second mortgage – you can borrow money using your home as collateral. The mortgage lender provides the loan, and you receive the money in one lump sum. There’s usually a limit to the amount of money you can borrow, with most lenders allowing you to borrow up to 80% of your home’s value, minus the principal balance of the mortgage. You can use this money as you see fit.

A home equity loan has closing costs and a fixed interest rate that is likely lower than what you’ll get with other consumer loans and credit cards. Your payments are fixed and you make them in addition to your mortgage payments (hence the label “second mortgage”).

With a HELOC, you leverage your equity through a revolving line of credit that you can draw from when needed. As with a home equity loan, a HELOC is provided by a mortgage lender and your home is used as collateral.

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A HELOC is more flexible than a home equity loan. You borrow money up to your credit limit and use it as needed. The draw period lasts a certain amount (eg 10 years), during which you usually only need to pay back the interest on the money you borrowed. After the draw period, a repayment period begins, during which you will receive regular payments.

A HELOC provides revolving credit at much lower interest rates than a credit card. You may also have an option for a lower starting rate. Bank of America, for example, currently* advertises a HELOC at 6.24% for the first six months, followed by a variable rate of 8.9%.

As with a home equity loan, the lender typically limits the amount you can borrow to 80% of the value of your home minus the principal mortgage balance.

Generally, there are no restrictions on how you can use a loan or line of credit. Because they give you access to a significant amount of funds, they are ideal for large projects and other needs that require a significant financial outlay.

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Home Renovations and Improvements — Projects that add living space, renovate outdated spaces (such as kitchens or baths), or provide needed structural upgrades (such as a new roof) can add value to a home.

However you decide to use home equity financing, it’s important to do so responsibly. Make sure you already have solid financial habits and have a plan to pay off your loan or HELOC. The lender doesn’t care how you use your home equity loan or HELOC. But he is waiting to return. And since your home is collateral, you risk losing it if you don’t make your payments.

You apply for a home equity loan or HELOC just like you would for a primary mortgage. Contact your mortgage lender to start the process.

You will be asked to provide documents, including bank statements and pay slips, to prove your ability to repay the loan. You will allow the lender to check your credit score and credit history. The lender will also arrange for an appraisal of your property to accurately determine the value of your home.

Home Equity Loans & Lines Of Credit

Once approved, the lender will explain how you will receive or withdraw your funds and how you will repay. You may also have to pay closing costs.

Home equity loans and HELOCs are powerful tools to help you get cash from your home equity that can be used in a variety of ways. But you have to understand the pros and cons.

When you sell your home, you’ll have to pay off both your primary mortgage and your home equity loan or HELOC balance

You may be able to claim a tax deduction if you use funds to improve your home (consult a certified tax collector for more information)

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To estimate the current value of your home, visit a site like Zillow.com and enter your address. You will see the current estimated market value of your home. Just remember that when you apply for a home equity loan or HELOC, the lender will need an independent appraisal.

Let’s say you have a growing family and want to hire a contractor to build an addition to your home. An addition will give you the living space you need while adding value to your property.

You receive a $50,000 estimate from a building contractor to complete the work. You meet with your mortgage lender, discuss a $50,000 loan, and fill out an application.

Your home is appraised at $400,000 and your mortgage balance is $175,000. The lender calculates your home equity by subtracting the balance of the mortgage from the value of the home.

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With your good credit score and low DTI, the lender approves your $50,000 loan application. You have a fixed interest rate of 7.0% and a repayment period of 120 months (10 years).

The lender transfers $50,000 to your bank account so you can hire a contractor and start your home improvement project.

Yes. Having an accurate understanding of your home’s value is critical for a lender to calculate your home’s equity. When you apply for a home equity loan or HELOC, expect the lender to arrange for an independent professional home appraisal.

The Federal Reserve sets the federal funds rate that banks charge each other for overnight loans. The prime rate that banks use to base interest rates on home equity loans and HELOCs is usually three points higher than the federal funds rate. So when the Fed raises the federal funds rate, we see interest rates on home equity loans and HELOCs increase.

Prime Rate Definition

Yes, you can get a HELOC and a home equity loan at the same time, as long as you meet the lender’s qualifying criteria for each. Just remember that with each successive loan or line of credit, you’ll be getting more and more of the equity in your home. This will limit the amount you can borrow.

You can use the money you get from a HELOC or home equity loan in any way you see fit—there are no lender requirements. Popularly used for home improvement projects, debt consolidation, and paying for higher education or emergency expenses.

The information presented here is created independently of the editorial staff. To learn more, see our About page. By: Kacie Goff By: Kacie GoffArrow The Right Personal Finance Contributor Kacie Goff is a personal finance and insurance writer with more than seven years of experience covering personal and commercial insurance options. She writes for , The Simple Dollar, NextAdvisor, Varo Money, Coverage, Best Credit Cards and more. It covers a wide range of policy types – including less-discussed coverages like wrap and E&O – and it specializes in auto, homeowners and life insurance. Connect with Casey Gough on LinkedIn Linkedin Connect with Casey Gough by email. Casey Goff and Jennifer Colonia Email Posted by Jennifer Colonia. Right Arrow Writer Jennifer Colonia is a writer and editor based in Los Angeles. She covered topics like debt, saving money, and credit cards. You can find her work on Business Insider, Forbes and more. Connect with Jennifer Colonia on Twitter Twitter Connect with Jennifer Colonia on LinkedIn Linkedin Jennifer Colonia

Edited by Troy Segal Edited by Troy Segal Right arrow Home Lending Senior Editor Troy Segal is a senior editor. She edits stories about home ownership in addition to stories about the ins and outs of mortgages and home equity loans. Connect with Troy Segal on Twitter Twitter Connect with Troy Segal on LinkedIn Linkedin Connect with Troy Segal via email. Email from Troy Segal

Heloc Vs. Home Equity Loan

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