Have you ever wondered how you can pay for large expenses like a home remodel or a child’s college education? Many individuals use a home equity loan (called a real estate equity loan at PSECU) or a home equity line of credit to cover these costs instead of depleting their savings.
If you own a home, you could qualify for a home equity product. These loan types can help you finance things you may not be able to afford comfortably with your monthly salary. But are there any limitations on these loans? Is there anything you can’t finance with this money? Our very own Heidi Stanalonis, PSECU’s Director, Mortgage & Home Equity Lending Services, answered some of these common questions we hear from members.
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Let’s start at the beginning. What is home equity?
Heidi: Home equity is the difference between your home’s appraised value and how much you still owe on your mortgage and any other property liens. For instance, if your house is worth $300,000 and your mortgage balance is $225,000, your remaining home equity would be $75,000 - or 25%. Your equity increases as your home's value rises, or as you pay down your mortgage or other home-secured debt. You can use a home equity product to borrow against a percentage of the equity you have in your home.
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So, what exactly is a home equity loan or line of credit?
Heidi: Both a home equity loan and home equity line of credit (HELOC) are home equity loan products.
With a home equity loan, you’ll receive your money in one lump sum up front and usually get a fixed rate on what you borrow, making it ideal for borrowers who prefer predictable monthly payments.
By contrast, a HELOC allows you to draw on the line of credit as you need it, giving you revolving access to cash for a set draw period. Your payment is then based on the amount of money you transferred or “advanced.” With a HELOC from PSECU, you’ll have the ability to choose between fixed- or variable-rate advances (It’s worth noting that fixed advances are only available with HELOC Plus).
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How do these options work?
Heidi: To qualify applicants for a home equity product, most lenders look at factors like your credit score, income, and loan-to-value (LTV) ratio - the total amount of mortgages or other liens on your property divided by its appraised value. This amount is then multiplied by 100 to be expressed as a percentage.
For example, say a $300,000 homeowner who had $225,000 left to pay on their home wanted a loan of $30K. The LTV ratio would be: ($225K + $30K)/$300K = .85. So, the LTV would be 85%. The higher your LTV, the higher your interest rate may be.
It’s important to note that you may not be able to borrow the full value of your home, depending on your lender. You should check with any potential lender prior to submitting your application to see what limitations they have in place.
Keep in mind that as with any mortgage, there may be closing costs associated with a home equity product, though they’re typically lower than a first mortgage. You begin to pay back your loan immediately and must repay it in full by the end of the loan term.
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What makes a home equity loan a smart option for someone?
Heidi: There are many advantages to tapping into your home’s equity instead of utilizing another type of borrowing option, such as lower interest rates, access to a greater loan amount, and flexibility.
If you know exactly how much you need and are looking for the stability of fixed payments over a set term, then a home equity loan is a great choice. It’s especially useful for large, one-time expenses like debt consolidation, a down payment, or a major home improvement project like a new roof. The predictability of a fixed rate and consistent monthly payments can also make budgeting easier.
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And a HELOC – when does that make more sense?
Heidi: A HELOC is ideal when you want ongoing access to funds over time. It’s a flexible solution for expenses that are spread out or predominantly unknown, like college tuition, home renos, or emergency expenses. The flexibility can be a big help, and if your HELOC has an interest-only option during the draw period, your monthly payments may be lower at first.
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What are home equity loans or HELOCs used for?
Heidi: You can use these loan types for a variety of things. However, most people use them for larger expenses, like remodeling a home, medical expenses, or as a secondary way to pay for college.
That said, there are some cases where a home equity loan might not be the smartest financial solution. Starting your own business, for example, is a risky proposition since you use your house as collateral. If things don’t go as planned, it could result in a worst-case scenario of losing your home, as well as your business.
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What payment options are available?
Heidi: We offer a variety of flexible repayment options depending on the product you choose.
With a home equity loan, your payments are fixed in both amount and schedule, making it easier to plan your budget. Payments are due on the 1st of each month and can be made via automatic transfer, ACH, digital banking, or coupon.
With a HELOC, you have more dynamic options. During the draw period, you may qualify for interest-only payments, which can help manage cash flow early on. As you repay the principal, those funds become available again. PSECU also offers a fixed-rate advance option, allowing you to lock in a rate on a portion of your balance while keeping the rest of your line open and variable. HELOC payments are due on the 16th of each month and can also be made through digital banking , or coupon. Be sure to review both of our HELOC options for their unique features. HELOC Flex offers interest-only payments during the advance period while HELOC Plus provides a fixed-rate advance option in addition to variable advances.
Are you in the market for a home equity product? We offer competitive rates, flexible terms, low monthly payments, repayment terms for up to 20 years, no PSECU application fees, and an easy application process for our members. Learn more about our home equity products and apply today!
