It’s remodeling season! All across the country, decks are being built, bonus rooms are being finished, and pools are being dug. After a long winter indoors, it’s only natural for us to think about sprucing up the home, whether it’s a luxury upgrade or an investment in your home’s infrastructure.
One of the most popular ways homeowners finance these improvements is through the equity they have in their homes. Equity simply means the value of your home and property over and above what you owe. For example, if you owe $150,000 on a home that’s valued at $200,000, your equity is $50,000.
Both a home equity loan and a home equity line of credit allow you to borrow against the difference between what you owe and what your home is worth. Generally, homeowners can borrow up to 75% of equity, but different lenders have different rules.
In our $200,000 home example, the homeowner could potentially borrow up to $37,500. Further, borrowers aren’t required to use the funds strictly for home improvements. A home equity loan may be used to pay for college tuition, for example. Most financial advisors recommend home equity loans and lines of credit be reserved for purposes that build wealth, such as remodeling, home repairs, or additions.
Although the terms “home equity loan” and “home equity line of credit” sound very similar, they are not the same.
In a Home Equity Loan, the homeowner borrows a fixed amount of money, usually sufficient to cover the anticipated costs of the project, up to the home equity cap. Many homeowners like that the total amount of funding is available to them immediately; their payments are fixed and level, and the interest rate being charge will never change over the term of the loan.
A Home Equity Line of Credit is structured more like a credit card. Upon approval, the homeowner knows how much is available to them through their HELOC and can draw upon the funds as needed, up to predetermined number of years. Funds can be accessed by check, online baking, in person or, in some instances, through a branded credit card. Homeowners like the HELOC product as it allows them to use only the funds they need when they need them. Monthly payments vary based on the amount owed, which can be helpful in certain circumstances.
Unlike a home equity loan, the HELOC carries with it a variable interest rate, meaning the borrower could see interest rates increase across the term of the HELOC, up to a set limit. In certain circumstances, interest paid on a HELOC may qualify as a federal income tax deduction.
The University of Kentucky Federal Credit Union (UKFCU) offers both home equity loans and home equity lines of credit at very attractive rates for credit union members. Eligibility for both home equity loans and home equity lines of credit requires that the home is owner-occupied and located in Kentucky. Annual Percentage Rate (APR) is based on credit history and subject to change.
For more information on Home Equity Loans and Home Equity Lines of Credit through UKFCU, stop by your nearest branch, or visit the credit union online at UKFCU.org.