Home Equity Loans and Lines of Credit: What You Should Know

Borrowing and Credit, Home Ownership

Home Equity and How It Works

Understanding what home equity loans are requires knowledge about equity itself. Equity is the difference between a home’s fair market value and the current balance of the loan. Your home is one of your biggest investments, and its equity is a valuable asset. If your home is worth more than you owe, you have equity, and you can capitalize on it by borrowing against the home’s value.

Types of Home Equity Loans

Whether you need extra money to make home repairs or improvements; fund the purchase of a second home or land; or consolidate debt, a home equity loan or home equity line of credit (HELOC) are good options.

  • Home equity loan – a large sum of cash received up front to be repaid over time with fixed interest monthly payments
  • Home equity line of credit – a set amount of money that can be withdrawn as you need it over many years with variable interest charged only on the amount you use

How to Get a Home Equity Loan or Line of Credit

Both home equity loans and HELOCs provide access to a large amount of cash using your home as collateral. If you fail to repay, a credit union or bank can take back your property and sell it to recover any unpaid funds. Lenders are required to verify your finances and check your credit before approving any loans or lines of credit. Other paperwork is also required for the application including:

  • W2 earning statements for the last two years
  • Federal tax returns for the last two years
  • Bank statements for the last few months
  • Recent paycheck stubs
  • Proof of income including investment income

Risks of a Home Equity Loan or Line of Credit

Having a large sum of cash on-hand or the ability to withdraw it as you need it is a great benefit; however, it’s important to understand the risks.

  • Debt – With a large amount of cash also comes a large amount of debt. It’s tempting to use your home’s equity (and the cash you borrowed from it) as an ATM. Therefore, it’s crucial that you spend the cash on something that will increase the value of your home or life.
  • Fees – You must pay closing costs (often thousands of dollars) before you receive the cash. Frequently borrowing against your home’s equity can be a very expensive habit.

Is a Home Equity Loan or Line of Credit Right For You

As a good rule of thumb before you secure any new debt, be sure to do your due diligence.

  • Do your research to figure out if a home equity loan or line of credit is best for your situation.
  • Create a plan of your income and expenses including the possible new monthly payment.
  • Talk to friends and family about their recommendations.
  • Manage your credit.

Learn more about home equity loans and lines of credit by speaking with a Centris service representative at (402) 334-7000 option 0. We’ll help you evaluate your specific situation, discuss your options and determine the best product to meet your needs.

<a href="https://www.centrisfcu.org/blog/author/liz-nowaczyk/" target="_self">Liz Nowaczyk</a>

Liz Nowaczyk


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