Over time, the value of your home has grown and your mortgage balance has been reduced or even eliminated. The equity – the property’s value minus any liens against it – you now have in your home is a reservoir of funding potential. You may decide to tap into it for various purposes, such as remodeling your home, paying off high-interest loans or credit card debt, buying a car or sending your child to college.
Our clients receive expert advice about financial decisions such as tapping the equity in their home, including a review of other options. We’re happy to act as a financial quarterback or your personal chief financial officer, someone who can provide unbiased advice when you need it most. And since we get to know you well enough to Stand in Your Shoes, we’ll be able to make recommendations based on what we’d do in your situation.
The pros and cons
Home equity financing (which may be set up as either a loan or a line of credit) is secured by the equity you’ve built up in your home. This type of financing has several advantages compared to other forms of personal loans:
- Higher borrowing limits
- Favorable interest rates
- Tax-deductible interest – if you itemize your deductions on your federal income tax return, you may be able to deduct the interest on up to $100,000 ($50,000 if married filing separately) of home equity debt.
There can be drawbacks, however:
- You may have to pay closing costs and other fees
- If you sell your home, you’ll have to repay the outstanding balance
- Since your home is collateral securing the debt, you run the risk of foreclosure if you can’t make your payments
Home equity loans
Often referred to as a second mortgage, a home equity loan generally allows you to borrow a fixed amount of money (typically up to 80 percent of your equity) at a fixed rate of interest. The total amount you borrow is advanced to you when you sign for the loan. You’ll repay the loan with equal monthly payments over a fixed term.
Home equity lines of credit
When you arrange a home equity line of credit, your lender establishes a revolving credit limit determined in part by the amount of your equity. You then borrow only what you need (up to the maximum allowed) only when you need it (subject to any time limit on the borrowing period). You can access the funds either by writing a check or using a credit card associated with the account.
The interest rate for a home equity line of credit is generally a variable rate tied to an index. Your monthly payments may vary, depending on your outstanding balance and the prevailing interest rate. You may have the option of making interest-only payments over the course of the repayment period (e.g., 10 years), or minimum payments that cover a portion of the principal plus accrued interest, coupled with a balloon payment of principal at the end of the loan’s term.
Choosing between the two
When deciding whether to apply for a home equity loan or a line of credit, it’s important to consider how much you’ll need and how soon you’ll need it. If you want a fixed amount of money for a specific purpose, you may wish to take out a home equity loan that advances you the total amount up front. If instead you’ll need an indeterminate amount over a few years, such as funds for ongoing college expenses, you may benefit most from a home equity line of credit that you can draw on when needed.
Shop around for the best deal
Whatever choice you make, you’ll want to shop around to find the most favorable rates and terms. Here are a few things to consider:
- In an effort to attract your business, a lender may be willing to absorb or waive some or all of the costs (e.g., application fees and points) of obtaining the financing.
- The frequency of variable interest rate adjustments and any caps on rate increases will affect the overall cost of a home equity line of credit.
- If you’re considering a home equity line of credit, find out if you have the option to convert the line to a fixed-rate, fixed-term loan in the future.
- When comparing a home equity line of credit to a home equity loan, don’t rely solely on the annual percentage rate (APR) as a measure of cost, because the APR for a home equity loan takes points and financing charges into consideration while the APR for a home equity line of credit does not.
*Past performance is not an indicator of future results. This material is not financial advice or an offer to sell any product. The statements contained herein are solely based upon the opinions of Elevage Partners, LLC (“Elevage”). Elevage is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, which may be requested by calling (877) 922-8243 or visiting http://www.adviserinfo.sec.gov. The information contained herein is derived from sources we believe to be reliable, but which we have not independently verified. Elevage assumes no responsibility for errors, inaccuracies or omissions in this information. Elevage reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive. It should not be assumed that any of the securities transactions, holdings or sectors discussed were, or will prove to be profitable, or that the investment recommendations or decisions Elevage makes in the future will be profitable or will equal the investment performance of the securities discussed herein.ELV-17-02