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Ask Kim: Navigating Home Equity Loans

President & CEO Kim Sponem answers financial questions.

Yes, it’s possible to create the home of your dreams, and it may be easier than you think with a home equity loan. But how does it work? Get up to speed with these tips from our very own Kim Sponem.

Q: We just purchased a new home with the intent of fixing it up over the next few years. I know a little bit about home equity, but how can we use this to make the needed updates?

A: Let’s start with some home equity basics as a quick introduction. Home equity loans allow you to borrow against a portion of the equity you have built up in your home. You have equity when your home’s value is higher than the amount you owe. For example, if your home is valued at $250,000 and your mortgage balance is $150,000 you have $100,000 in equity. What portion of that is available for you to borrow and at what rate will vary by lender. Whether it’s the best borrowing choice for you will vary by your own financial situation. In general, my advice is to not borrow more than 80% of your home’s value for purchases. Keeping at least 20% of your home’s value untouched will help you if property values decline and you need to sell your home. In this scenario, that would equate to borrowing no more than an additional $50,000.

Home equity loans come in two forms:

  1. A closed-end home equity loan – a lump-sum loan with a set repayment time.
  2. A home equity line of credit (HELOC), which is revolving credit for a set period of time.

For example, let’s say you qualify for and want to borrow $10,000 for renovations. If you took out a closed-end loan, you’d get the $10,000 up front and then make payments each month for a set term until the loan was paid off. If you took out a $10,000 HELOC, you could draw out any or all of it – just what you need as you need it – and, as you pay it down, the funds would become available for you to draw from again and again until the end of your HELOC agreement. Most of the time people will set up a HELOC for more money than they currently need in case they want to use it for future needs.

Many people find the HELOC handy because they can borrow only what is needed as their projects progress. And once that is complete, they can use it for other things as well without having to reapply. Summit members tell us their HELOCs also give them peace of mind because they know money is available to them instantly if they need it, and Summit Credit Union does not charge an annual fee for the loan. Using the equity in your home to make upgrades is often a good borrowing choice because the rate is often lower than other consumer loans, and the interest you pay may be tax deductible (check with your tax advisor).

Let us know what you want to accomplish instead, and we can give you options that allow you to choose what’s best for you. It may be best for you to use a HELOC for your fix ups. It may be best to save for them over the next year by setting up a special “Fix up” savings account with automatic deposits with each paycheck. It may be best to do a combination. Or maybe it will be best to refinance your car loan to lower your payment and help you save. Home equity is often a great choice when you take on projects that increase the value of your home. And it’s good to check out your options with a professional who has experience helping people choose the right product for their situation.

Ready for a revamp? Learn more about home equity options, and schedule a meeting with one of our financial coaches to help figure out what’s best for you.