Did you know that your home – one of the largest investments you will ever make – can also be a financial tool used for your benefit?
A home equity line of credit, also known as a HELOC, is a form of credit that is considered a second mortgage on your home (or a primary mortgage if you own your home outright). With a HELOC, you borrow against a portion of your home’s equity – usually up to 85% – depending on your credit history.
Equity is calculated by subtracting the amount you still owe on your primary mortgage from the overall value of your home. For many borrowers, that’s a large sum of money – which is why HELOCs are typically used for large purchases. So, if you’re looking to cover the costs of things like renovating your home, buying a second home, starting a business, paying for education, or consolidating or paying off debt, a HELOC might be a great option for you.
We talked with Jean Chalifoux Kiely, Executive Vice President and Director of Consumer Banking at Sunrise Banks, about what you need to know if you’re considering applying for this line of credit.
How a HELOC differs from a home equity loan
If you’re considering a HELOC, you might be wondering how it compares to a home equity loan. For starters, a HELOC offers cash on an as-needed basis, while a home equity loan provides the borrower with a lump sum.
Another major difference is that the interest rate on a HELOC is variable. HELOCs are typically tied to the prime rate, which is an interest rate index that fluctuates based on changes in the economy. When the prime rate increases or decreases, so does the interest rate on your HELOC and therefore the amount of your payments.
While a home equity loan also allows you to convert some of your home’s equity into cash, the variables of this line of credit are fixed. That means the interest rate remains the same throughout the life of the loan, and therefore your loan repayment amount is consistent each month.
Advantages and disadvantages
An advantage of a HELOC is that if it’s within the draw period, which typically ranges between five and ten years, you will have ongoing access to those funds. If the money is there, you can continue to re-borrow against the line without having to reapply for another home mortgage.
“I like to compare the features of a HELOC to the features of a credit card,” Jean explains. “It’s a revolving line of credit, and you only pay for what you use. So, if you’re approved for $100,000 and you utilize $50,000, you can use the other $50,000 without reapplying. So, there’s flexibility there to use it, then pay it back, then use it again and pay it back.”
Jean says that, on the other hand, a home equity loan is more comparable to a car loan.
“With a home equity loan, you borrow a certain amount up front,” she says. “For example, if you plan to do a $50,000 home remodel project, that full amount would be disbursed at closing. Then you would pay it back, in full, by the end of the loan’s term. Typically, everything on a home equity loan is fixed – the rate, the payment amount and the term.”
One thing to keep in mind is that with either a HELOC or home equity loan, you are using your home as collateral. If you are unable to meet the repayment requirements, you risk foreclosure on that property. However, you can achieve low interest rates with either option because your home can back both the line of credit and the loan.
How to determine which one is right for you
There are several factors to consider if you’re unsure which option is best for your individual situation.
Some of the most pertinent pieces of information include what you plan to use the money for, how much you will need to borrow, and whether you will need the funds upfront or disbursed over time.
“For example, if you come to me for a loan to do a kitchen remodel, I may ask if you plan to do the work yourself or if you’re planning to hire a contractor,” Jean explains. “A HELOC might offer additional flexibility if you’re going the do-it-yourself route, or you don’t know all the costs right now. In this scenario, you’d only make payments on what you’ve used as you use it.”
“On the other hand, if you have a quote from a contractor or know exactly how much you plan to spend, a home equity loan may be the best option,” she adds.
Other specific factors to weigh are current interest rates, closing costs and additional fees, the repayment schedule, and other terms of the loan, which can vary by lender.
“Borrowers should also consider risk tolerance,” says Jean. “Some borrowers aren’t as comfortable with a large line of credit with a variable rate. If you budget down to the penny, a home equity loan might be better because of the consistent, predictable payment.”
If you are intentional with your spending, however, and can avoid impulse purchases, Jean says that a HELOC might be the way to go.
“Having those funds when you need it is great from a peace-of-mind perspective,” she says. “It’s amazing to have it available to you if you have an unexpected disruption to your income, which is why it’s best to apply for a HELOC before you begin a project.”
Why you should consider applying for a HELOC through Sunrise Banks
If you decide to pursue a HELOC, Sunrise Banks is currently running a no-closing cost offer*. From now until September 30, 2024, borrowers who meet certain criteria may save anywhere from $350 to $3,000 on closing costs.
The no-closing cost option includes things to reflect county recording fees, credit report fees, and other fees associated with closing on a loan. It also covers the appraisal of your home – a necessary step in the application process as it determines the amount of equity you have in your home.
Along with the appraisal, Sunrise Banks will require borrowers to provide proof of income – such as a W2 or a paystub – as well as proof of insurance for the property.
“It’s a great time to apply because Sunrise Banks has a competitive HELOC,” Jean says. “It’s a good idea to have that just-in-case fund on hand for any of life’s unexpected moments.”
Ready to apply for a HELOC? Sunrise Banks has you covered with an easy and convenient online application. For more information or to connect with one of our trusted loan officers, visit our HELOC webpage or call us at 651-265-5600.
Member FDIC. Sunrise Banks is an equal housing lender.
*Home Equity Line of Credit –The Annual Percentage Rate (APR) is variable and based on an index plus a margin. The APR will vary with the Prime Rate (the index) published in the Wall Street Journal. As of March 13, 2024, the variable rate for home equity lines of credit ranged from 8.50% APR to 9.50% APR. The rate will not vary above 21.75% APR, applicable state law, or below 5.25% APR. No closing cost special is for new money only. No closing cost promotion is valid from April 1 – September 30, 2024. Property insurance is required. Rates are subject to change. All loans are subject to credit approval and compliance with underwriting standards.
Nicole Rothstein is a freelance writer based in Cleveland, Ohio.