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The cost of borrowing has risen sharply in recent years, so when it comes to tackling a big expense, it’s important to know about the options.
For established homeowners, their house is likely their greatest asset and, perhaps, their greatest source of financial flexibility. By tapping into their home equity, homeowners can access funds for a variety of expenses and at competitive rates.
How It Works
Home equity loans (HELOANs) and home equity lines of credit (HELOCs) are two avenues that homeowners can pursue if seeking funds at a relatively reasonable cost. Both options are secured by the borrower’s home, so with this asset in mind, lenders tend to offer lower rates than on unsecured loans, like personal loans or credit cards. With both options, borrowers can also access up to about 85% of their home’s appraised value. Of course, the ultimate rate, term and limit will vary based on individual creditworthiness.
Both borrowing options share one more feature: the risk of foreclosure. Because HELOANs and HELOCs use the home as security, borrowers who stop making payments risk losing the home. At First Interstate Bank, mortgage specialists advise clients to consider how much they need and what they can pay back before borrowing any sum and signing on the dotted line.
Explore Your Options
Once homeowners have a good grasp of their needs, it’s time to decide whether a HELOAN or HELOC is a better fit. A HELOAN, often called a second mortgage, is similar to a traditional fixed-rate mortgage. Borrowers apply for a set amount and receive a lump sum upon approval. They also pay a fixed interest rate for the life of the loan and start making payments immediately on the principal and interest. These loans may be advised when homeowners know the full cost of a specific need, such as debt consolidation or a big purchase. Also, they may be advantageous if interest rates are expected to rise, as a lower rate at the outset gets locked in for the entire term.
With a HELOC, homeowners get access to a line of credit with a set limit. For a certain period of time, called a draw period, borrowers can draw from this line of credit as needed. This flexibility can be advantageous in many situations, such as when paying for a renovation with many variables or for emergency expenses. During the draw period, most lenders require interest-only payments, and once the period expires, borrowers must repay principal along with interest. While some lenders may offer fixed rates on HELOCs, most tend to have variable rates that can rise or fall. If interest rates are expected to decline, a variable-rate HELOC could help borrowers take advantage of those lower rates.
Homeowner How-Tos
To help homeowners make informed decisions about borrowing, First Interstate Bank offers online calculators to help determine available home equity and understand payment schedules, on-demand home buyer education courses, and a knowledgeable team eager to make your dream home become your everyday home.