Home Equity
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Amy Raymond, Vice President,
Residential Lending |
Dear Salisbury Banker:
My husband and I would like to use the equity in our house to finance some renovations - but we don't know whether to take out a home equity loan, or a home equity line of credit. Is there a difference? Help!
EQUITY CHALLENGED
DEAR CHALLENGED:
While both types of financing take advantage of the equity in your home (the difference between market value and what you owe on it), they work in slightly different ways.
A home equity loan is much like a mortgage. You decide in advance how much you need, and apply for a single loan, which you begin to pay back immediately. This is usually at a fixed rate, making it a good vehicle for one-time uses, such as a kitchen renovation or a new addition. It also simplifies financial planning.
A line of credit is different in that your lender sets a maximum line of credit, based on your equity, and you access it as you need it. Generally a home equity line of credit works similar to a credit card; you can borrow funds and repay them over and over for a set term, usually around ten years. After that, you will be required to pay back any remaining balance over a set period of time or in one balloon payment, depending on your lender's program. This type of loan is more likely to have a variable rate, so the interest rate may go up and down, as do payments. While this represents a little more risk and uncertainty, it may be the answer for ongoing expenses, such as college financing or multiple home improvement projects.
As for which to choose, that depends. If you know in advance exactly how much you'll be spending, the home equity loan may be the better deal. If you are not sure exactly how much your renovations are going to cost, a home equity line of credit could be a good choice. What's more, interest payments may be tax-deductible for both options. Ask your tax advisor for details.
For help figuring out your options, call or come in and talk to one of our Mortgage Advisors. We can help you determine what type of financing is right for you.
Amy Raymond, Vice President, Mortgage Origination
Do you have a question about home equity loans or lines of credit?
Please contact me at Banker@salisburybank.com
This information is provided for informational purposes only and does not constitute tax or legal advice. Always refer to your tax advisor for guidance for your particular situation. Opinions expressed herein are subject to change without notice. Information has been obtained from sources believed to be reliable, but its accuracy and interpretation are not guaranteed.