As you pay down your mortgage and/or your home’s value increases, your equity usually increases, too. Once your mortgage is fully paid, and as long as you have no other liens against the property, then your home equity amount equals your home’s value.
It’s important to realize that, when you borrow against your home equity, you are using your home as collateral. Also realize that you won’t be able to borrow the entire amount of your equity; you’re typically limited to no more than 75 to 85 percent of your home’s value, minus your mortgage balance.
|Home value x 85%
(e.g., $300,000 x 0.85)
However, because this type of lending is secured by your home, you may enjoy tax advantages. (Consult your tax advisor for details.) And you’ll likely have a lower interest rate than you would with most other types of financing, such as credit cards or personal loans.
What’s the difference between a home equity loan and a home equity line of credit?
With a home equity loan, you receive a single lump sum when the loan closes. Generally, the interest rate is fixed for the life of the loan, so your monthly payment also stays the same.
- Home equity loans are particularly good when you have a large, one-time expense like buying a new car, consolidating debt or paying sizeable medical bills.
A home equity line of credit (sometimes called a HELOC), gives you a revolving line of credit, similar to a credit card. You can take funds from your HELOC multiple times, up to your credit limit. And when you make payments against the balance, those funds become available for you to use again. HELOCs generally have variable interest rates, which may fluctuate over the time you have the line open.
- HELOCS are handy when you need to cover ongoing expenses, such as college tuition, a multi-stage home improvement project or life events (like a wedding) that may require you to make several periodic payments.
Look Before You Leap
Deciding to use your home equity is a serious financial decision. For help deciding whether it’s the right choice for you, visit your local branch to speak with a Rabobank representative.
The information contained in this article is intended for general educational purposes only and is not to be construed as legal, tax, or financial advice. Please consult with your own legal, tax or financial advisor for guidance with your own particular circumstances.