As the weather gets nicer and you start planning home improvements, you may be thinking about tapping into your home's equity ― the difference between the value of your home and what you may owe on any mortgages ― as a way to cover the costs.
Since our AVP and Loan Operations Supervisor Tom Crouse is retiring and turning the reins over to Kelly Piaskowski, who is celebrating her 20th year with Norry Bank, we wanted to sit down with them both and learn more about different types of home loans.
What’s the difference between a home equity loan and a home equity line of credit?
“Good question!” Kelly says. “A home equity loan is a borrowed one-time lump sum that is paid off over a set amount of time, with a fixed interest rate and the same payments each month. Your home secures the amount you borrow and acts as a guarantee that the debt will be repaid.”
So with a home equity loan, once you receive the funds, you cannot borrow further from the loan. When the amount is paid back, the loan is over.
On the other hand, Tom notes, “a home equity line of credit (or HELOC) allows you to 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 15-year period."
An important benefit of a home equity line of credit with Norry Bank, Tom adds, is that "our interest rate is usually much lower than other types of credit.”
Why choose a loan versus a line of credit?
Tom and Kelly agree: if you want to use the value in your home to pay for something once – like a new car or roof - you’ll want a home equity loan. Once you pay it off, the loan is done.
But if you plan to do ongoing improvements – renovating the kitchen this year, getting a new roof or furnace in a couple of years – you might prefer a line of credit, since your need is more ongoing. Lines of credit can also be used as overdraft protection for a checking account, which can be a good option for some consumers and businesses.
“You may also opt for the credit line because it offers interest-only payments,” Tom notes. So a monthly payment could be “cheaper” on a credit line than on a loan payment, which include both principal and interest amounts.
What’s the difference between fixed vs. variable rates?
Tom explains, “Fixed-rate financing means the interest rate on your loan does not change over the life of your loan. Variable-rate financing is where the interest rate on your loan can change, based on the prime rate or another rate called an ‘index.’”
With a fixed rate, “you can see your payment for each month and the total amount you’ll pay over the life of a loan.” Tom also adds that you might prefer fixed rates if you want a loan payment that won’t change. With home equity loans, the payment is a fixed amount each month, for instance.
With a variable-rate loan, the interest rate on the loan changes as the index rate changes, meaning that it could go up or down. Because your interest rate can go up, your monthly payment can also go up. The longer the term of the loan, the more risky a variable rate loan can be for a borrower, because there is more time for rates to increase.
But at Norry Bank, Kelly notes, we have a solution that allows you to repay a portion of your balance over a fixed-term, with a fixed interest rate. “This is our option line, and they’re often used for ongoing improvements to your home,” she says.
“Say you’re redoing the kitchen this year for $25,000: you can take $25,000 of your option line and put it into a fixed principal and interest payment. Then next year you want to replace the furnace for $10,000. You can put that new $10,000 amount into a different fixed principal and interest payment, separate from last year’s $25,000 payment. The option line does exactly what the name says - gives you as the customer a lot of options. Most people like the flexibility of paying the principal loan balance down when they want, as much as they want. And with the option line, there are so many choices in there that a borrower appreciates, like more control, more flexibility over how you use the money, and how you pay it back,” Kelly highlights.
What’s something you’d say is NOT a good reason to choose a home equity loan or line of credit?
Again, Tom and Kelly are in agreement. First, any borrower should consider the risk that if you default on your payments, a bank could foreclose on your home. Borrowing against home equity isn’t right for everyone and every situation, so make sure you understand both the benefits and potential risks.
Tom notes, “Expensive discretionary purchases, such as vacations or an extravagant wedding, for example, are generally not the best reasons to draw on your home equity. Remember that your collateral for your HELOC is the place where you live - your home. Be sure to carefully consider all of the options that might be available to you.”
Why choose Norry Bank for a home equity loan or line of credit?
“We can turn around home equity loans pretty quickly,” Kelly says. “We often can do a lien search in 48 hours and have the loan paperwork completed in less than 2 weeks, assuming we don’t need an appraisal.”
Tom also shares that “a lot of customers tell me that they like our option line. Once we’ve gone over what it is and how it works with them, they say they really like the features that let them have more control.”
What’s the best way for a customer to find and reach out to a lender, if they’re interested?
Talk to us about your plans for using the money, and we can help you find the solution that’s right for your needs, Tom suggests. You can find a lender near you to learn more about which loan option might be the best fit.