Home Equity Programs — Which is Best?
If you have a lot of equity in your home and want to unlock it, there are a few options to do so. Whether you’re looking to make home improvements, pay for your child’s education or pay medical bills, a home equity program may be your answer.
However, not all home equity programs are equal. So which one do you choose? Read on to find out the differences between home equity programs and gain a better understanding of which option is the best for you.
Home Equity Loans
True to its name, this type of loan uses the equity in your home as collateral. When you receive the loan money, you get it as a lump sum and tend to get a fixed interest rate, meaning that your monthly payments are the same.
You typically must have more than 15% equity in your home to get a home equity loan, because lenders usually will not let you borrow more than 85% of your home’s value. In order to calculate your home equity, you can take your estimated home value and subtract your mortgage loan balance (and any other loans against your house).
For example, if your home is worth $200,000 and you still owe $90,000 on your mortgage, then your loan-to-value ratio is 45%. You can likely borrow up to $80,000 with a home equity loan, which would put your combined loan-to-value ratio at 85%.
Pros: You can secure a lower interest rate than on a credit card or personal loan. The more equity you have in your home, the more you will be able to borrow. And any interest payments are also considered tax deductible.
Cons: If you do decide to take out a home equity loan, keep in mind that there may be upfront fees and costs – not to mention the interest you will pay on the loan. It’s a good idea to compare those costs as well as consider your monthly payment amount. If you already have trouble making debt payments every month, adding another loan is probably not a good idea. If you were to default on your home equity loan, you could lose your home.
Who it’s good for: A home equity loan is best for those who need a large sum of money to make costly home repairs pay medical bills, or for any other large, well-defined expense.
A home equity line of credit, or HELOC, is similar to a home equity loan. The main difference is that with a HELOC, you can borrow money numerous times as needed, as long as you don’t exceed the maximum credit limit on your HELOC. Another difference is that a HELOC usually has adjustable interest rates, meaning your payments may vary from month to month.
Most HELOCS allow you to borrow over a certain amount of time, also known as the “draw period.” During this time you take out money as needed and make minimum payments. After the draw period ends you cannot borrow any more money. Depending on your loan terms, your minimum payments may change as you pay back the loan, known as the “repayment period.”
A HELOC may grant you up to 85% of your home’s value minus what you still owe on your mortgage. Keep in mind that it the value of your home drops significantly, your lender may not let you take out any more money under your current plan, meaning you may not be able to take out as much money as you originally thought.
Pros: You can borrow money when you need it, rather than all at once.
Cons: You might pay a higher interest rate and you could pay more over time.
Who it’s good for: A HELOC may be a good option for if you don’t need to a borrow a large amount of money or you aren’t sure how much money you need to borrow – for example, if you need to make a few home repairs and upgrades. With a HELOC, you can withdraw money as expenses arise, unlike a home equity loan where you borrow the entire amount at once.
Home Ownership Investments
A home ownership investment is essentially a partnership between you and an investor. Companies like Unison – with their Unison HomeOwner program – allow you to access your home equity without any monthly payments or interest charges. They provide money that you can use for up to 30 years – until you sell your home or you buy them out.
In return, the investor shares a portion of the future change in the value of your home. If your home goes up in value, they share the gain. If your home goes down in value, they share the loss. In other words, the company hopes to make money by investing alongside you in the home.
With this type of program, you are still the homeowner and you still get the benefit of all principal payments you make on your mortgage. You can make home improvements on the home and sell it at any time you wish.
Pros: You can use the equity in your home without adding monthly payments. This gives you a much greater deal of flexibility than any other home equity program.
Cons: You will have to share the appreciation, if any, in your home’s value when you sell it. Also, not all homes will be approved for a home ownership investment. Different investors may look the condition of your home and geographical location to decide whether or not to approve you.
Who it’s good for: Home ownership investment programs may be a good option for you if you want access to equity without needing to pay any monthly payments or interest charges, and if you’re comfortable sharing future appreciation with an investor.
No matter which home equity program you choose, keep in mind that you need to abide by the terms and conditions listed. For example, if you don’t make your monthly payments on time, your home may face foreclosure. Think about why you need the equity and make a plan for how you will pay it back. If you don’t think you’ll be able to pay it back, then don’t take out the loan. Leveraging the equity in your home can be beneficial, but using your home as collateral can come with risks. Make sure you do your due diligence and weigh all pros and cons before making a decision.