Collins Community Credit Union

What is a home equity loan?

Have you ever heard a co-worker joke about taking out a second mortgage to fund all the travel and equipment for their daughter’s competitive soccer league? That actually is a possibility, as there are two main types of second mortgages: a home equity line of credit and a home equity loan.

Published on Aug 22, 2019

A home equity loan is a type of loan where a borrower can use the equity of their home as collateral if the value of the home is greater than the dollars owed on the mortgage, while a home equity line of credit is a revolving credit line that is replenished as the outstanding balance is paid.

With a home equity loan, you can borrow up to 80% of your home’s value, minus what’s still owed on the mortgage. For example, if your home is valued at $275,000 and you owe $195,000 on the note, you could be eligible to borrow up to $25,000 depending on your credit score and financial history. Typically, a credit score of 620 or higher will be required while a credit score of 700 and above will most likely qualify.

If approved for a home equity loan, you’ll receive the entire sum of the loan at once, then you’ll repay the loan at a fixed rate over a set number of years. (Unlike a mortgage term of 15 or 30 years, a home equity loan has a shorter-term life, typically between five and 20 years.) Each monthly payment will include the principal and interest toward the loan.

There are many advantages to utilizing a home equity loan, including that the borrower will be able to make predictable fixed-rate monthly payments and will have the potential to receive lower interest rates than those that are available on credit cards and personal loans.

While it may not be wise for your co-worker to actually take out a home equity loan just for soccer supplies (or a luxury car or three week vacation overseas, for that matter), home equity loans are ideal for homeowners wanting to make home improvements, finance their children’s educational costs, pay off or consolidate high-interest debt, or build an emergency fund.

Before taking out a home equity loan, be sure you don’t borrow more than you need and that you can afford to repay both your mortgage and your new home equity loan. After all, it would be hard to enjoy your recently completed home improvements like the new saltwater pool if you are worried about making the payments for them.

Stop in today to talk to us about a home equity loan that can help you meet your financial goals.

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