There are times when you need to make repairs to your home and don't have the cash on hand to do the job. Home equity loans or lines of credit enable homeowners to access the equity in their home up to an amount representing a specified percentage of the homeowner’s equity in the property.
Let’s take a look at some large upcoming expenses of two different families: the Jones family and the Smith family.
The Jones family has two kids, a daughter finishing up high school and a son still in elementary. Mr. Jones is a prominent businessman in town and bought the family house about twelve years ago. He bought the house using a 30-year fixed-rate mortgage because he knew the place he was buying would be his family’s forever home.
Since the Jones family has been paying down their mortgage for over a decade they have accrued significant equity in their home. Mr. Jones’ daughter, Sally, is sorting through her college acceptance letters. She has had the good fortune of being accepted to many of her first-choice schools.
She is a smart girl and those four-year institutions will not be cheap. Luckily Mr. Jones is not worried. He knows he may be eligible to draw from the value of his home’s equity by borrowing up to a certain amount for the life of the loan. This is known as a Home Equity Line Of Credit or “HELOC” for short.
He knows he may be eligible to draw from the value of his home’s equity by borrowing up to a certain amount for the life of the loan. This is known as a Home Equity Line Of Credit or “HELOC” for short.
Over the course of whatever time limit is set by the lender, he may be able to draw from his equity to pay for Sally’s tuition, housing, books and the occasional pizza party for her and her newfound friends.
He may be able to access the line of credit via a credit card or special checks. He knows could assist with nearly any school on his daughter’s first-choice list. Mr. Jones rests easy knowing his investment in his home may very well help him invest in his daughter.
Then there are the Smiths. Mr. and Mrs. Smith’s children are all grown up and have families of their own. The two are happy to have the house to themselves again, and recently they have been considering renovating their kitchen.
It is a drab affair right now. There is no flow, the colors are unwelcoming and the cabinets need refinishing. Mrs. Smith has been bugging Mr. Smith for ages to do something about that kitchen. What she would not give for a bright breakfast nook with a wraparound window over there in the corner.
In this instance, since they are looking at a large one-time expense, the Smiths are considering a home equity loan. A single lump sum that is paid off over a fixed amount of time with a fixed interest rate.
Mr. Smith is happy that he can use the investment in his home to increase its value and make his wife happy at the same time. Mrs. Smith is excited about the prospect of enjoying her morning coffee while she looks out on her rose garden from the comfort of her beautiful new breakfast nook.
Both families are looking at large expenses in the near future. However, since each family’s expenses are unique, they each decide on a different solution to unlock the equity of their respective homes.
While a HELOC may provide more flexibility than a fixed-rate home equity loan, keep in mind that HELOC’s have a variable interest rate that will fluctuate over the life of the loan. HELOC payments will also vary depending on your interest rate and the amount of credit that you have used. Lastly, everything must be paid off when the line of credit expires.
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