A home equity loan is one way to finance big-budget items or projects. However, before you make your decision, you’ll want to make sure you have all the information you need to ensure you’re taking a home equity loan out at the right time.
What Is a Home Equity Loan?
Home equity loans are a way to borrow money by leveraging the equity of your home. The loans are based on the home equity you’ve built, meaning how much you’ve paid on your existing mortgage versus the value of your home.
Related: Why Should I Build My Home Equity?
When you take out a fixed-rate home equity loan, you borrow a lump sum from your bank and pay it back over a set period of time at a fixed interest rate.
What Is a Home Equity Line of Credit (HELOC)?
Since we’re discussing home loans, let’s also take a quick look at a home equity line of credit (or HELOC). Similar to a fixed-rate home equity loan, with a HELOC, you’re borrowing against the equity of your house. However, it’s different from a fixed rate home equity loan in that it’s a line of credit, not a lump sum.
A HELOC is like a pot of available money that you can draw on as you need it — sort of like a checking account or, more accurately, a credit card, because you pay interest on the money you borrow. You’re given a maximum amount you can borrow, but you don’t have to use it all, and you won’t pay interest on the portion you don’t use.
| Home Equity Loan | Home Equity Line of Credit |
| Fixed rate over the duration of the loan | Variable rate |
| One-time/lump sum | Line of credit |
| Rates tend to be slightly higher than a HELOC | Rates tend to be slightly lower than a home equity loan |
When to Take Out a Home Equity Loan
Back to fixed-rate home equity loans — many people wonder, “When is the best time for me to take out a home equity loan?”
It all depends on your personal finances. Before taking out a home equity loan (or any type of loan, for that matter), you should have a steady, reliable source of income. You should also make sure you budget accordingly for the payments you’ll have to make on the loan.
Typically, you’re required to repay the home equity loan if you sell the house. So if you’re planning on selling your home in the near future, before you would finish paying back the home equity loan, make sure that’s accounted for in your budget.
Related: How To Build Value In Your Home
Why Take Out a Home Equity Loan?
Many people choose to take out home equity loans because they come with interest rates that are generally lower than they would be for other loan types or a credit card payment.
The advantage of a home equity loan over a HELOC is that the rates are fixed. That makes it easier to budget for as you plan for the years to come. If you go with a HELOC, you’ll want to keep an eye on the rates.
What Are Home Equity Loans Good For?
If you have a big expense coming up, it’s a good time to consider a home equity loan.
Most people use home equity loans for the following:
- Home renovation or improvement projects.
- Emergency needs, such as a flooded basement or an unexpected hospital stay.
- Consolidation of credit card debt, which on average comes with higher interest rates than home equity loans.
- Land purchases.
Where to Get a Home Equity Loan
When it comes to home financing, it’s essential to work with a lender you trust. When you’re looking at banks, keep an eye out for red flags like a lender who is unwilling to commit to a rate. Rates can fluctuate, but a reliable lender should at least be able to give ballpark figures.
Mercer Savings Bank is a mutual bank, meaning we don’t have shareholders — our customers own the bank. Our goal is to help you make your goals happen. If you’re interested in a home equity loan, contact us online or visit one of our locations for more information.
