It can be tough to find the cash you need to cover major expenses, like a home improvement project, college tuition, or the dream wedding you want to plan. If you’re looking at your savings and scratching your head about how to pay, homeowners may consider tapping into the equity on their home.
Equity is essentially the amount of your home that you own, equaling the appraised value minus what you still owe on your mortgage. If you’re well on your way to paying off your mortgage, you may have a good deal of equity—even fairly new homeowners may find they have a reasonable amount of equity—if their home has increased in value.
You can typically borrow up to 80% of that equity through a home equity loan (or second mortgage) or a home equity line of credit (or HELOC). PenFed allows you to borrow up to 90% loan-to-value (LTV) on owner occupied properties for its line of credit and fixed equity loans. For its interest-only home equity line of credit, PenFed allows you to borrow up to 85% ltv.
Both of these financial products do the same thing: borrow from your equity to give you the financing you need at lower interest rates than a traditional loan or line of credit. And, even better, the interest you pay may be tax deductible¹, making borrowing against your equity one of the most affordable ways to get the extra loan funds you need.
What’s the difference between a Home Equity Loan and a HELOC?
Depending on what you want to pay for, one equity product might be better than the other. A home equity loan gives you a lump sum up-front, whereas a HELOC lets you borrow as much as you need (up to a maximum amount) when you need it.
So what can you do with your equity—and should you get a loan or a line of credit? Let’s take a look at some common ways homeowners use their equity.
What can I use the equity in my home for?
Home improvement. This is one of the most common reasons to use equity, as increasing the value of your property will further increase your equity. It can be an excellent long-term investment—and you’ll enjoy the updated improvements for as long as you own the property.
Either type of loan can work depending on how you’re doing the remodeling. Are you paying a contractor a large up-front sum? If so, a home equity loan is perfect. Are you paying different contractors for different projects at different times—or DIYing your renovations with a variety of costs as you go? Then a HELOC will be the better option because you can borrow as much as you need (up to a maximum amount you were approved for) when you need it.
College tuition. Student loans to help put the kids through college may look appealing, but you’ll think twice when you see the interest racking up. Using home equity can let you put them through school while minimizing your interest costs—and, again, you may be able to deduct those interest costs from your taxes¹, bringing the price down further.
A HELOC is ideal for tuition, because you can take out as much as you need to pay for tuition and books each semester rather than trying to estimate your costs in advance for a home equity loan.
Debt consolidation. Juggling multiple credit card bills can be a headache, but you can consolidate all of that debt—and save on interest costs—by using your equity. Beyond the convenience of just having to worry about a single bill, this will likely cut your interest rates significantly, which can mean big savings.
In this case, a home equity loan is ideal—you borrow what you need up-front, and it allows you to make one affordable, fixed monthly payment.
Weddings and vacations. You could keep pushing back that dream wedding or family vacation until you’ve built up enough savings, but you can also tap into your equity for these big ticket expenses. Even though you’re borrowing the money, the low interest rates on an equity loan or line of credit will make this a much better option than putting it on your credit card.
While you could take out a home equity loan if you know the exact amount of your wedding or vacation, it’s easy to go over-budget with such events. For these types of life events, a HELOC might be a better option, as it gives you more flexibility with how much you’re borrowing and when you’re borrowing it.
Regardless of what you want to buy, PenFed has the right equity programs for you, with low interest rates and few closing costs. With affordable rates and most closing costs paid² by PenFed, it’s easy to get the equity loan financing you need—and stop racking up interest on credit cards or other higher interest loans.
Offers are as of May 5, 2016 and are subject to change without notice. To receive any advertised product you must become a member of PenFed by opening a share (savings) account.
¹See your tax advisor for details on tax deductibility of interest.
²Closing Cost Credit: PenFed will pay most closing costs, which includes: credit report, flood certification, settlement/closing, property ownership and encumbrances search, recording, city/county taxes, state taxes, property search and quick close. If an appraisal is required, the cost will be paid by the member, who is responsible for the fee whether or not the loan closes. The member is responsible for notary fees. Should this loan be paid off or closed within 24 months from the anniversary date of the loan closing, the member will be obligated to pay PenFed the full amount of the total closing cost for the loan. Other terms and conditions apply; call 1-800-970-7766 extension 6400 for details.
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