Home Equity Loans 101

Everything You Need to Know

Summer’s almost here, which means it’s the perfect time to start planning your summer vacation or thinking about that big home renovation. But for many people, there’s one question on their minds: how am I going to fund this? A good option for many people is a Home Equity Loan or Line of Credit. Today, we’re going to tell you some important things to know about a Home Equity Loan or Line of Credit, and how it could be a good option for you.

  1. What is a Home Equity Loan? A Home Equity Loan, or Line of Credit, allows you to borrow money using your home's equity as collateral – turning your home’s equity into cash. 
  2. What’s equity? Equity is the difference between how much your home is worth and how much you owe on the mortgage, if any. For example, let’s say you buy a house for $200,000 and borrow $150,000. $200,000 (home’s purchase price) - $150,000 (amount owed) = $50,000 (equity). The equity in your home can increase or decrease over time depending on its market value. 
  3. What’s collateral? Collateral is property that you pledge as a guarantee that you will repay a debt. With a Home Equity Loan or Line of Credit, you pledge your home as collateral. This is basically the lender’s way of protecting themselves if you ever default on your loan.

  4. If I own a home, am I automatically eligible for a Home Equity Loan or Line of Credit? Owning a home does not guarantee approval for a Home Equity Loan or Line of Credit. There are a few stipulations you must meet first. According to lendingtree.com, the main ones are:

    Having available equity in your home
    A good/decent credit score
    The ability to repay your loan (steady income)
    A low debt-to-income ratio

    If these stipulations are met, it shows the lender you’re at low-risk for defaulting on  your loan, which means you’ll be more likely to be approved for a Home Equity Loan or Line of Credit.

  5. What are the repayment terms for a Home Equity Loan or Line of Credit? A line of credit generally has a variable interest rate that fluctuates over the life of the loan. Payments vary depending on the interest rate, the amount owed and whether the credit line is in the draw period or the repayment period. During the equity line's draw period, you can borrow against it and the minimum monthly payments cover only the interest, although you can elect to pay principal. During the repayment period, you can't add new debt and must repay the balance over the remaining life of the loan.

    The draw period often is five or 10 years, and the repayment period typically is 10 or 15 years. Those are generalizations, and each lender can set its own draw and repayment periods. A line of credit is accessed by check, credit card or electronic transfer requested by the consumer. Lenders often require you to take an initial advance when you set up the loan, withdraw a minimum amount each time you dip into it and keep a minimum amount outstanding.

    Finally, with either a home equity loan or a line of credit, you must repay the loan in full anytime you sell the home.

    What makes a Home Equity Loan so appealing to so many is its flexibility – you can literally use it for anything! So whether it’s consolidating debt, repaying student loans or paying for that big home renovation, this type of loan can be a good option. Another helpful trick is to look for financial institutions that offer a special promotion with their Home Equity Loan. For example, BMI FCU is running a promotion now through the end of July that will give you a $150 cash bonus when you open a new Home Equity Loan or Line of Credit. Read our full promotion details.

    Don’t be afraid to really take your time and pick a loan that’s right for you. With a little planning and thoughtful consideration, you’ll be taking that vacation or enjoying your newly renovated home in no time!