With home values on the rise, home equity loans and home equity lines of credit are once more becoming popular tools for financing. Thanks to its low interest rates, a home equity loan is an attractive loan option for many borrowers. For other consumers, though, a home equity line of credit (HELOC) is easier to secure and less expensive in terms of total interest paid.
If you’re considering either one, you’ll want to understand the advantages and disadvantages. Rules vary by state, but here’s a brief primer on how each one works in Texas.
Using Your Home Equity
So what is equity, and how is your home involved? Equity is the value of your unencumbered interest in a piece of real property. In other words, it’s the value of the house or property that you actually own.
For instance, if you had a home that was worth $300,000 and you only owe $100,000 more on the mortgage, your equity would be $200,000.
Put Your Home Equity to Work
Learn more about how you can take advantage of your home’s value for your next home improvement project.
Texas Laws Around Home Equity
Texas has some unique laws when it comes to using the equity in your home, and if you plan on taking out a home equity loan or HELOC, it’s important to understand how they might affect you. We won’t get into the nitty-gritty here, but here are some things to be aware of:
- You cannot use more than 80% of your home’s equity
- You can only have one outstanding equity loan secured by the same property at one time
- You can only take out one equity loan every 12 months on a property
Knowing these rules can help you better plan and choose which home equity product is right for you.
HELOC vs. Home Equity Loan Comparison
Here’s a side-by-side comparison of home equity loans and home equity lines of credit.
|Home Equity Loan||Home Equity Line of Credit|
|Does it use your home as collateral?||Yes.||Yes.|
|Type of Credit||Installment credit.||Revolving credit.|
|Loan Term||Home equity loans are set up with five- to 20-year terms similar to your original mortgage, with equal monthly payments spread over that time.||HELOCs typically have a 10-year draw period followed by a 10-year repayment period.|
|Loan Amount||Minimum loan amount for Home Equity Loan is $25,000 at Amplify. Maximum loan amount depends on your equity value.||At Amplify, HELOC minimum draws are set at $4,000. Your HELOC credit limit depends on your equity value.|
|Interest Rate||Interest rates on home equity loans are fixed.||HELOCs have variable interest rates that may fluctuate over time.|
|What can you use this loan for?||You can use home equity loans for anything you’d like. Common uses include home renovation, debt consolidation, and college expenses.||You can also use HELOCs for anything you’d like, however, these loans are especially useful for projects with ongoing expenses, such as home renovations.|
|Closing Costs||Fixed $325 fee for all loan amounts at Amplify.||Fixed $325 fee for all loan amounts at Amplify.|
How They’re Alike
As you can see in the chart above, home equity loans and HELOCs have numerous similarities.
For one, both use your home as collateral. Though it’s rare in Texas, it is possible to lose your home if you fail to make payments on a home equity loan or HELOC. Remember to always do the math to ensure you can afford monthly payments with a little wiggle room for emergencies.
Secondly, you can use HELOCs and home equity loans however you see fit. Of course, there are better ways to use your home equity than others, but there are no rules that you must abide by when it comes to use.
How They’re Different
Though their foundations are both built on home equity, these two financial products have several key differences. The main distinction between these two financial products is how the money is distributed.
With a home equity loan, a borrower will receive your funds in a one-time lump sum. The minimum and maximum amount that you can take out may vary depending on your financial institution and how much equity you have.
With a home equity line of credit, on the other hand, a borrower will be preapproved for a credit limit. A HELOC allows for a 10-year draw period during which the borrower draws money as they need it; borrowers can choose to make interest-only payments or regularly pay off the balance without penalty. Any balance not paid by the end of the agreement can be refinanced into another HELOC or subjected to regular installment payments.
Another important distinction between the two is the interest rate. Home equity loans have fixed interest rates, meaning you won’t have to guess what your rate will be a few years down the line. HELOCs have variable interest rates, which can change due to market fluctuations or changes in your credit score.
Pros and Cons of Home Equity Loans and HELOCs
|Home Equity Loan||You have a fixed amount to plan around, which can make budgeting monthly payments easier at the onsetReduces the temptation to overspendHas a fixed interest rate, so there are no surprisesHas lower interest rates than personal loans||If you need more money, you can’t get another home equity loan until the first has been paid offYour home is collateral|
|Home Equity Line of Credit||Borrow (and pay interest) only on what you needAs long as the line of credit is open and you haven’t reached your limit, you have money available for emergencies or projects that go over budgetHas lower interest rates than other lines of credit like credit cards||Payment amounts may fluctuate depending on what you’ve drawn from the lineInterest rates may go upYour home is collateral|
Other Loan Options for Homeowners
Amplify offers a similar unsecured product called a Homeowner Express Loan, which offers a maximum balance of $40,000 without the requirement of home equity, liens, or closing costs. A loan period of five, seven, or 10 years is ideal for homeowners who lack equity and/or need immediate funds.
Interested in using your home equity?
Ready to tap into your home’s equity? Contact Amplify Credit Union today to learn more about home equity financing and how to get started.