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Your home is possibly the most important and most expensive purchase you will make. One advantage to this investment is letting the equity build up over time. This equity can then be tapped into and used for various reasons. The top five reasons one might use this advantage would be to put the funds back into the home, pay off debt, keep an emergency fund on hand, use it for investments, or other large purchases.
A Home Equity Loan Compared to a Home Equity Line of Credit (HELOC)
Both home equity loans and a home equity line of credit are consumer loans that are secured by the borrower’s home. As a borrower pays down their mortgage to a point where the value exceeds the amount owed, they have built up equity in the home. One major difference between the two is that a home equity loan is received as a lump sum.
A home equity loan has a fixed term, with a set amount of money borrowed, which the borrower will receive as a lump sum upfront. This loan looks much like other loans with a fixed interest rate, fixed payment amount, and the payments are principal and interest.
A Frontier Bank home equity line of credit has two different segments. The HELOC has ten years of a “draw” period which allows the borrower to use the funds when they so choose. After the first ten years, it will transition into the repayment period if there is a balance. This means the borrower will pay principal and interest payments on the remaining balance over ten years.
It is up to the borrower when they wish to use the funds. Meaning, during the draw period, they would be eligible to draw all of the funds or just some, whenever they would like. During the first ten years the minimum payments interest only. This makes a HELOC a more convenient and flexible option.
Ways to Use the Funds
Home Improvements
The new year could come with a new look to your home. Using the funds from home equity is a great way to give your home the updates or additions it needs to better suit your needs. This especially comes in handy when looking to increase the home’s value before selling.
Consolidate Debt
The advantage of home equities is that you can use the funds to better your finances overall. A HELOC can pay off debt at higher interest rates like credit cards and student loans, or decrease the payments.
Surprise Expenses
Unlike other loans, a home equity line of credit does not have to be used immediately. A HELOC can grant peace of mind by creating an emergency fund for a time in need. By keeping home equity on hand, you have access to funds to cover any kind of event that might come up from fixes on a vehicle to paying medical bills.
Investment or Business Purposes
If you are lucky enough to have an opportunity to invest your money or grow your business, why not be ready? Tapping into the investment that you call your home can help you be financially ready for any opportunity that arises.
Big Purchases
A very exciting way to use your home equity would be to manage large expenses like buying a second home, taking a dream vacation, or paying for a wedding/event. Of course, there are other ways to finance these expenses like a credit card or personal loan. However, those options do not grant the flexibility of a HELOC like interest-only payments while in the draw period, plus a lower rate than that of a credit card or personal loan.
For more information on home equities, reach out to a Frontier Bank lender. We look forward to helping you make the best decision for you and your specific needs.
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