Homeownership has long been considered part of the American dream. The conventional wisdom is that owning is better than renting, mainly because of the concept of building home equity through ownership. As a homeowner, there may be times when you question the advantages of ownership as you calculate the annual amounts you spend on property taxes, home repairs, homeowners’ insurance, and mortgage payments.
Despite the additional expenses a home can bring, homeownership offers many benefits. As the years pass, your home builds equity that can help you fund special projects and protect you against unexpected life events. Since 1891, Union Bank has been helping our neighbors in Vermont and New Hampshire tap into their home equity and get the most out of homeownership. This article will further explain the concept of home equity and show you how a home equity line of credit (HELOC) can work for you.
What is Home Equity?
Home equity is the increase in your home’s value over time, relative to the balance of your mortgage. If you owe $100,000 on your mortgage and the appraised value of your house is $225,000, you have accrued $125,000 in home equity ($225,000 – $100,000). If you decide to sell your home, you will reap this profit at the time of sale. If you’re not ready to sell, you can still benefit from your increased home value with a home equity loan or home equity line of credit (HELOC). If you’re unsure of your home’s value, the lending team at Union Bank can help you determine the current amount of equity in your home.
When can you begin to tap into your home’s equity?
Remember the day that you purchased your home? Your down payment helped you immediately own a percentage of your home, while the remaining portion was financed by the bank. Typically, in order to benefit from a home equity line of credit, you have to own at least 20 percent of your home. Paying off the principal, and not just interest, with your monthly mortgage payment helps you build equity. Once you own more than 20 percent of your home, you can apply to borrow up to 80 percent of your home’s equity. For example: If your home is valued at $200,000, 80% of the value is $160,000. If your first mortgage balance is $150,000, you could possibly qualify for a $10,000 loan.
What is a HELOC?
A HELOC is a secured loan in which your home equity acts as collateral. You are approved for a maximum loan amount and write checks against the loan as you need them. The typical loan duration is 10 years, during which you pay interest on the amounts you borrow. After your borrowing period ends, your repayment period begins. During your repayment period, you can expect to pay back principal and interest until the loan is paid off. A typical repayment period is 10 years. These time frames vary from bank to bank, but the concepts of borrowing and repaying remain the same.
How is a HELOC different from a credit card or other personal loans?
A home equity loan is a lump-sum loan, but a HELOC acts more like a credit card. With a home equity loan, you receive the entire loan amount and start paying interest on the full amount immediately. If you need additional funds, you must complete the application process again for a new loan.
A HELOC allows you to apply once in order to have access to a large amount of funds over time. With a HELOC, interest only accrues on the amount you borrow. For example, you could be approved for a $100,000 HELOC and immediately borrow $8,000 on a new HVAC system. Interest payments on the $8,000 would begin, and you would retain access to the remaining $92,000 to use as needed.
With a credit card, you are often limited to a smaller loan amount than a HELOC. Because credit cards are unsecured debt, you pay a much higher interest rate than a secured home equity line of credit. Interest on credit cards is not tax-deductible, but HELOC interest can be deducted from your taxes in certain situations. According to the IRS, tax-deductible loan interest is typically available for funds that are used to “buy, build, or substantially improve your home.”
How can I use a HELOC?
If you’re wondering why you should open a HELOC, there are many different reasons. If you wish to reap the tax benefits of a home equity loan, you’ll want to use the funds for home improvement projects. Consult your tax professional before deciding how you will spend your HELOC.
Purchases made from a HELOC don’t have to be house-related. You can use your home equity line of credit to fund any personal need. Because HELOCs offer a lower interest rate than credit cards, many borrowers tap into their home equity to fund the following situations:
- Consolidate credit card debt
- Pay for a wedding
- Afford a child’s college tuition
- Start a new business
- Fund a dream vacation
- Make a down payment on a second home
- Renovate a kitchen or bathroom
- Purchase new appliances
Because funds in a HELOC remain available for many years, they can serve as an emergency fund for your family. Unexpected medical bills, car repairs, or household maintenance can be paid for with funds from your HELOC. Since you don’t accrue interest until you spend the money, your home equity line of credit is a great safety net, should unexpected costs arise.
Union Bank has the right HELOC for you
As a true community bank, Union Bank approaches home equity lending with the same core values we bring to all of our services. Personalized attention allows us to get to know your current situation and financial goals. Attentive customer service means someone is always available to answer your questions. And we offer all of the same online banking and other convenience services as the bigger banks.
If you’d like to know more about home equity loans and HELOCs, stop by any of our 18 branch offices in northern Vermont and northern New Hampshire. Our team can help you find the perfect home equity loan for your situation. If you’re ready to use your home equity to invest in home renovations or pay down credit card debt, our online mortgage application is easy to navigate and can help you get started. For the best HELOCs in Vermont and New Hampshire, contact Union Bank today.