Many homeowners find themselves in need of extra cash to pay for unexpected medical bills, a new car, college tuition, home repairs or home remodeling. A UCCU home equity loan, home equity line of credit or mortgage refinancing can solve this need. However, each is different and offers its own advantages.
Home equity loan
A home equity loan is secured by the equity value in the member’s home. The member uses the equity in his home as collateral for the loan. Home equity loans are useful for individuals who need a large sum of money quickly – for a short-term need – to pay for such things as medical bills, debt consolidation or a new car. Home equity loans are often considered second mortgages, even though they may have a lower interest rate than the original mortgage. The amount of the loan can vary but can be up to 80 percent of the home’s value. Home equity loans are generally issued in a lump sum.
A home equity loan is fairly straightforward to obtain. A simple credit check and a home appraisal are usually needed in order to apply for a home equity loan. The homeowner receives a lump sum with a low fixed interest rate. This allows you to have fixed, consistent and predictable monthly payments.
Taxpayers enjoy significant tax advantages, including interest deductions, with home equity loans, but always check with your tax accountant for your specific situation.
Home equity line of credit
A home equity line of credit (often referred to as a “HELOC”) may be viewed as a form of revolving credit, with your home serving as collateral. The maximum amount of a home equity line of credit is generally the same as for a home equity loan. As with a home equity loan, the member can usually use the loan as he or she sees fit. Home equity lines of credit are usually used for ongoing expenses, such as paying for college tuition, home improvements or recurring medical bills.
A home equity line of credit requires the same documentation as a home equity loan – a credit check and home appraisal – and is easy to apply for. However, a home equity line of credit is issued in the form of a credit card or checks. Once an amount is approved for a line of credit, the member can continue borrowing up to the maximum.
Home equity lines of credit are useful for members who might need a large sum of money over a longer period of time. Examples include home remodeling and college tuition. Home equity lines of credit act like credit cards but with some clear advantages. Home equity lines of credit typically have much lower interest rates – often below prime – and fees than do standard credit cards, so paying off high-interest credit cards may be a good use of a home equity line. That said, the interest rate on home equity lines of credit is often variable as compared to the fixed rate on most home equity loans.
When you refinance your mortgage you are generally replacing your current mortgage. You are “cashing out” your current mortgage and replacing it with a new mortgage under current market conditions. Members typically refinance when rates have decreased enough to make it worthwhile to refinance – meaning they will be paying less overall interest or lowering their monthly payments. Members often refinance a first mortgage to shorten the life of the loan, seek a lower interest rate or reduce the monthly payment.
If the Federal Reserve cuts interest rates to stimulate the economy, you may be able to secure some savings from refinancing your mortgage. On the other hand, if you have an adjustable-rate mortgage and are not able to keep up with your mortgage payments, then refinancing may be the answer. Keep in mind, there are fees and closing costs associated with refinancing your primary mortgage.
Refinancing generally makes sense if you are going to remain in your home for a number of years in order to recoup the closing costs and mortgage refinancing fees. Additionally, refinancing from a 15-year loan to a 30-year loan may not make sense if you end up paying more over the life of the loan.
Whether you are thinking about a home equity loan, home equity line of credit or mortgage refinancing, Utah Community Credit Union can help you figure out which one best suits your needs and which option will be most cost effective.