Home equity terms all owners should know
Borrowing money has been expensive as of late. Thanks to a combination of decades-high inflation and elevated interest rates meant to rein it in, borrowers have seen interest rates on many products surge. Credit card interest rates are frequently around 20% now, mortgage rates hit a 23-year high last summer and even many personal loan rates are now around the double digits mark. There is still one relatively inexpensive way to borrow money, though, but it's only available for homeowners: home equity.
While not as complex as some other borrowing options, the home equity borrowing process can be bumpy if owners aren't familiar with their options and some frequently used phrases and terminology. Below, we'll help navigate the home equity vocabulary terms all borrowers should know now.
Explore your home equity options online now to learn more about this unique option.
Home equity terms all owners should know
Here are six important home equity terms all owners should know now.
Home equity
Before successfully borrowing from the accumulated home equity owners should know exactly what it is. In short, it's the amount of money you have paid toward your mortgage, minus what you owe to your lender. It's simple to calculate. Say your home is estimated to be worth $500,000 but you have a remaining balance of $100,000. In this case, your home equity would be $400,000. Since most lenders allow you to borrow around 80% to 90% of your equity, you could then withdraw $320,000 to $360,000.
See how much home equity you could borrow here.
Home equity loan
A home equity loan is a loan borrowers can make from their existing home equity. They don't have to take all of what they've accumulated and can apply for a specific amount (within the aforementioned guidelines). Interest rates on home equity loans are fixed, providing some predictability for the borrower, but the money they apply for will need to be withdrawn in one lump sum, even if they ultimately discover that they borrowed more than they needed.
Home equity line of credit (HELOC)
HELOCs operate similarly to home equity loans except for some key differences. Unlike home equity loans, HELOCs function as a revolving line of credit like traditional credit cards do. This means that the amount you ultimately use will evolve month over month. That's a major advantage compared to home equity loans, however, because you'll only have to pay the interest on the amount you used not, like home equity loans, on the full amount you were approved for. On the other hand, HELOCs come with variable interest rates (more on that below).
Home equity interest rate
Home equity interest rate is exactly that - the interest rate you'll pay for borrowing from your home equity. Rates vary based on the lender, the product and the borrower's creditworthiness. As of January 22, interest rates on home equity loans were 8.91% and 9.31% for HELOCs. While those may seem to be high, historically, they're some of the lowest on the market now thanks to your home being used as collateral for the borrowing.
See what home equity interest rate you could secure here.
Variable interest rate
This is a key difference between both primary home equity borrowing options. Home equity loans come with a fixed interest rate, meaning it won't change for the duration of your loan until or unless you refinance it. HELOCs, however, come with variable rates subject to change based on a series of economic conditions. This could be an advantage or a disadvantage depending on your perspective and your plans for using the money. Just do your research and crunch the numbers first to ensure that you can adequately pay back what you borrowed.
Home equity loan tax deduction
Did you know that you could deduct the interest you paid on a home equity loan or a HELOC on your taxes for the year you used it? Home equity tax deductions are a major advantage for both home equity loans and HELOCs, even if they need to be utilized for specific home repairs and renovations to qualify. Still, compared to some other borrowing options, this can be an attractive feature for those owners who are already planning their spring projects.
The bottom line
Both home equity loans and HELOCs come with attractive features for borrowers, particularly in today's volatile rate climate. To make sure they work best for homeowners, however, it's critical to understand the nomenclature lenders will use. By understanding these terms and phrases borrowers can better position themselves to borrow their existing home equity and, more importantly, to pay it back in a structured, cost-effective manner.
