Equity in your home is a unique financial advantage that can offer an affordable way to fund a wide range of other life milestones, including home renovations, emergency expenses, debt consolidation, weddings, higher education, and more. Home equity loans—like a home equity loan (HELOAN) or home equity line of credit (HELOC)—leverage the value in your home to provide you with flexible funds for other needs.

Some homeowners may be hesitant to access their home’s equity, as it requires your home be collateral for the loan. However, once you understand how a home equity loan works—and its potential benefits—you may find it is the best solution for your current financial needs.

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What is a Home Equity Loan?

A home equity loan allows you to access a portion of the equity in your property. You can calculate your home’s equity by subtracting the amount you owe on your home from its current market value.

Home Equity = Market Value of Home – Amount Owed (Mortgage Balance)

For example, if your home appraises for $350,000 and you still owe $200,000 on your mortgage, your home equity would be $150,000. You can use a home equity loan to access a portion of these funds.

There are three key benefits to home equity loans:

  • Lower Interest Rates: Since your home is used as collateral for the loan, the interest rates are typically much lower than alternatives, such as credit cards or personal loans.
  • Flexible Terms: The loan terms can extend up to 10 years or more, helping to keep your monthly payments affordable.
  • Higher Borrowing Limits: Most homeowners can borrow significantly more money through a home equity loan than credit cards or personal loans.

What Are the Types of Home Equity Loans?

There are two types of home equity loans, known as a HELOAN (home equity loan) and HELOC (home equity line of credit). While both leverage the equity in your home, there are differences between a HELOC and HELOAN:

  • Home Equity Loan (HELOAN): A traditional home equity loan provides you with the borrowed funds upfront in a lump sum. The interest rate is typically fixed, meaning it will not change over the life of your loan. These loans often work well for one-time projects, such as home renovations, debt consolidation, or paying for an event, like a wedding.
  • Home Equity Line of Credit (HELOC): A HELOC functions similarly to a credit card. You will be approved for a specific credit limit that you can borrow from as needed. When you repay the balance, the funds are available to use again. HELOCs generally have variable interest rates, meaning they can fluctuate over time with the economy. These loans are ideal when you have several ongoing projects or want peace of mind knowing you can access funds whenever needed.

When Is it Ideal to Use a Home Equity Loan?

While there are no limits to how you can use a home equity loan, you do want to spend responsibly and within your limits, because your home is used as collateral with home equity loans. As long as you plan to use the money responsibly, these loans can be financial lifesavers due to the lower interest rates, flexible terms, and higher borrowing limits.

There are two main categories for using home equity loans: building equity and financing tools.

  • Building Equity: Using the equity in your home to generate even more equity is an excellent idea. Homeowners often accomplish this through home renovations. Whether repairs or remodels, using your existing equity to improve your living space and add more value to your home can be a win-win.
  • Financing Tools: Another popular way homeowners use their home’s equity is to finance projects, events, or improve their financial situation. These lower-rate loans provide affordable solutions for just about any cause, including:
    • Debt Consolidation
    • Milestone Events (e.g., a wedding)
    • Medical Expenses
    • Higher Education

How to Use a Home Equity Loan Responsibly

Home equity loans provide many financial perks to homeowners. The ability to borrow low-cost funds with extended payment terms is financially significant. However, you also want to avoid improper spending.

Before you apply for a home equity loan or borrow from your existing HELOC, ask yourself a series of questions:

  • Why am I borrowing this money? Will it improve your financial situation? Will it add value to your home?
  • Can I comfortably repay this loan? Do you have a secure job and a consistent monthly income? Is the monthly payment affordable?
  • Is this the ideal option? Can you obtain the funds in a more affordable manner elsewhere, such as an emergency fund or savings account?

Taking a moment to review your options is a crucial step to ensure responsible borrowing and spending.

Credit Union 1 members have access to competitive rates and expert team members to help you choose the product that is right for you. You can open a HELOC or HELOAN online, in person at your local branch, and over the phone.

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