Home Equity & HELOCs

Home equity loans and HELOCs are similar in that you’re borrowing against the equity in your home but differ in terms of how you access funds and make repayments. Typically home equity loans give you a sum of money all at once, while a HELOC is a revolving line of credit, similar to a credit card where you have a set limit that you can draw funds from as needed until you reach your limit.

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Home Equity (Closed-end Second) Mortgage

A Home Equity home loan occurs when a homeowner takes out two loans simultaneously: one for 80 percent of a home’s value, and the other to make up for whatever cash is lacking to make up a 20 percent down payment. The purpose of a Second Mortgage is to eliminate the need for private mortgage insurance (PMI).

Home Equity loans are also known as Closed-end Seconds. The most common type of Home Equity loan is an 80/10/10 where a first mortgage is taken out for 80 percent of the home’s value, a down payment of 10 percent is made and another 10 percent is financed in a second trust loan at a higher interest rate. In some cases, you may even qualify for a Home Equity loan with as little as a 5 percent down payment (known as an 80/15/5).

When considering a Home Equity loan, keep these factors in mind:

  • You will have to make two loan payments each month — one for your mortgage and one for the second loan.
  • You will close on both loans at the same time so you most likely have to pay closing costs, which will require additional upfront cash.
  • Typically, the interest rates are higher on Home Equity loans.
  • Monthly payments of both loans may still be less than they would be if you were paying PMI.

Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit is a revolving line of credit that lets you access the equity in your home – any time, for things like home improvement projects, major purchases, and anything you might need 'just in case.'

Home equity is the difference between the appraised value of your home and the balance on your mortgage. The line of credit is for a set number of years. You can borrow money up to your credit limit for the first period of the loan—typically 10 years—while you make at least the minimum monthly payments. When your borrowing period ends, you must repay the loan in full, usually over a 20-year period.

Here are a few ways homeowners commonly use HELOCs:

  • Improve and upgrade your home
  • Access lower interest rates on credit card, car loans and student loans
  • Consolidate your debt
  • Help manage the costs of higher education

When considering a HELOC Loan, keep these factors in mind:

  • A HELOC often has a lower interest rate than some other common types of loans, and the interest may be tax deductible. Please consult your tax advisor regarding interest deductibility as tax rules may have changed.
  • You should also consider the risk that if you default on your payments, the lender could foreclose on your home. Borrowing against home equity isn’t right for everyone and every situation, make sure you understand both the benefits and potential risks.