Home Equity Loan vs Home Equity Line of Credit
April 16, 2015 by Triangle Credit Union
What is the difference between a home equity loan and a home equity line of credit? They both use your home as collateral, but there are a few key differences which I will explain in this post. First, I’ll give a general explanation of home equity. Despite economic upswings and downswings, home ownership remains one of the surest paths to financial security for many Americans. As home owners pay down their primary mortgages, they are gaining equity. For example, if you only owe $100,000 on a house that has a current appraised value of $200,000, you could conceivably sell that house at a profit. A home equity loan or line of credit is the means by which a home owner can access that potential profit without taking their house to the market.
The main feature of a home equity line of credit is its flexibility. It is an ideal product for a home renovation project or education expenses that do not yet have a fixed cost. At Triangle, we offer two different types of home equity lines, an 80% Loan-to-Value (LTV) line* and a 100% LTV line**. LTV represents the amount of equity that you can pull from your home. In the example above, $200,000 appraised value, $100,000 primary mortgage, you could borrow up to $60,000 with the 80% line and up to $100,000 with the 100% line. See the calculations below:
|(80% x Appraised value) – Outstanding mortgage = Available Equity|
|(80% x $200,000) - $100,000 = Available Equity|
|$160,000 - $100,000 = Available Equity|
|$60,000 = Available Equity|
|(100% x Appraised value) – Outstanding mortgage = Available Equity|
|(100% x $200,000) - $100,000 = Available Equity|
|$200,000 - $100,000 = Available Equity|
|$100,000 = Available Equity|
After the application, approval, and closing process, both the 80% line and the 100% line work the same. You can draw on the line of credit for 10 years; payments are amortized over a 15 year term. There is no annual fee (some of our competitors charge a fee each year). No prepayment penalty. No minimal balances. Check Books are issued and as you write checks you will be billed according to the amount owed, similar to a credit card. The rate on both products is tied to the prime rate as published by the Wall Street Journal and is subject to change at any time. Though a safe and reliable product, a home equity line is best used for expenses that you plan on paying down in a short period of time. Ideally, a home equity line of credit is a product that you could use and re-use as different needs arise. It is a great safety net to have in place.
The main features of a home equity loan are fixed term and lump sum disbursement. If approved for a $60,000 home equity loan, the full amount of the funds would be disbursed to you after closing. That means you would immediately begin accruing interest on the outstanding balance and would have to make monthly installment payments just as you would a primary mortgage. A home equity loan is suitable for debt consolidation and for a fixed one time need. Once paid down, you would not have access to the equity in your home as you would with a home equity line of credit unless you reapply.
I have covered a lot in this post and borrowing against your home is a serious financial decision that should always be discussed with an expert. At Triangle, we offer free consultations and would welcome the opportunity to review your current financial situation, your future goals, and to help you assess which product makes the most sense for you.
**Annual Percentage Rate (APR) is 5.75% fixed until 7/1/2017, loan subject to underwriting qualifications, terms and conditions may vary. Your actual rate and margins will be determined by your credit history. Rate is variable, based on the Wall St. Journal Prime Rate (Prime + 2.50%) as of 4/30/2015 and is subject to change at any time, with a maximum rate of 13.75%. Home Equity Line adjusts semi-annually with a cap of 2/8 and a floor rate of 5.0%, maximum Loan-To-Value 100%; maximum credit line is $175,000 for owner occupied property.
Estimated fees total between $400 and $800. Homeowner insurance required; Flood insurance may be required. If you advance $25,000 at closing, TCU will pay up to $500 of your closing costs; (offer available on current TCU lines if you advance an additional $25,000). If you pay off or close your Home Equity Line within three (3) years, you agree to reimburse the credit union for closing costs. Maximum loan amount $500,000 - Total first & second mortgage cannot exceed $1,000,000. Triangle Credit Union is an Equal Housing Lender and federally insured by the NCUA. NMLS #528721.