Is a Home Equity Right for You? Pros, Cons, and Considerations

There are so many wonderful aspects to owning a home. Sure, it comes with its challenges, and it can certainly be expensive. But owning a home also helps you build wealth.

Real estate is generally a pretty stable asset. If you’re paying your mortgage on time and keeping up with maintenance, then you should be building equity, and your home is likely growing in value.

That’s great news when the time comes to sell, but it’s also great news if you ever need to tap into the equity of your home with a low-rate home equity loan. There are several benefits to using a home equity loan and there are also different types.

We’ll begin with the basics.

What is a home Equity?

If you took out a mortgage to buy your house, you essentially share ownership of the property with a bank  until your home mortgage is totally paid off. So, your home equity is how much of your home’s value you own versus how much the bank owns.

Home equity is calculated by subtracting your mortgage balance from your home’s current market value. The value you own increases every time you pay your mortgage and anytime your home goes up in value.

Here’s an example:

Let’s say the market value of your house is currently: $250,000

Your mortgage balance is: $100,000 (the amount the bank owns)

That means your home’s equity is: $150,000 (the value you own)

Why is home equity important? 

Having equity in your home means you’re building wealth! If we look at the example above, you currently have $150,000 in assets. We’re talking generally, of course, because other factors come into play, but you get the idea.

You can also tap into your home’s equity to borrow money for, well, anything you like! Borrowing money against the equity in your home is called a home equity loan. So, what is a home equity loan? How does a home equity loan work? There are two types.

Home Equity Loan vs. Home Equity Line of Credit

These terms often get used interchangeably, but they’re different and one might work better for you than the other.

Home Equity Loan

Lump sum: The entire loan amount is deposited in your account in one payment.

Fixed rate and term: With a fixed rate and repayment term, you’ll know exactly how much your payments are for the entire length of the loan.

Works great for big ticket expenses: Home renovations, debt consolidation, wedding expenses, and more. If you’re using a home equity loan to improve your home, you’ll likely increase the value of your home as well!

Also known as: This is sometimes called a second mortgage.

Home Equity Line of Credit (HELOC)

Revolving credit: Similar to a credit card, you can borrow as much or as little of your HELOC as you like, up to your specified limit. For example, if your limit is $50,000, you can borrow up to that amount and you’ll only pay interest on your current balance.

Variable rates: The rate will fluctuate based on the current market rates, which means your payment may fluctuate each month based on the amount you borrow and the current interest rate.

Works great for ongoing projects or smaller expenses: Home projects, medical expenses, a vacation, emergency funds, car repairs, etc.

What are the benefits of a home equity loan or HELOC?

Flexible financing: You have the power to tackle your dreams and goals – like finally tackling that kitchen renovation, paying for a new roof, consolidating high-rate debt or funding a wedding.

Lower interest rates: Home equity loans and HELOCs typically have lower interest rates than a credit card or personal loan – making them a more affordable option.

Higher loan amounts: You can typically borrow a larger amount with a home equity loan or HELOC than you could with a personal loan or credit card, because the funds are secured against the value of your property.

What should I consider beforehand?

Using your home as collateral: This is the most significant risk, because you’re using your home as collateral. If you don’t repay your loan, the lender could foreclose on your home in a worst-case scenario.

Adding to your debt load: If you’re tapping into your home’s equity, it’s important to consider what the monthly payments will be and if you can comfortably repay them.

Closing costs and fees: Unlike a personal loan or credit card, you’ll likely be required to pay upfront fees, which could include an application fee, closing costs, appraisal fee, etc.

Potential for negative equity: If your home decreases in value while you’re still paying a home equity loan, then you could end up owing more than your home is worth. Sometimes called “being underwater”, this is an uncommon situation. In the U.S., an average of 2.7% of mortgage holders are underwater on their loans. In Ohio, the average is 4.3%. So, while it’s unlikely this will occur, it’s good to be aware of the possibility.

Why Buckeye?

We’re proud to do banking better! Because we’re a credit union, we don’t answer to shareholders. Our not-for-profit structure means that profits are returned to our members in the form of low rate loans and interest-earning accounts.

Whether you want a home equity loan, HELOC or anything else, you can count on exceptional service from start to finish and some of the best home equity loan rates in all the communities we serve – Alliance, Akron, Canton, Hartville and Cleveland (and the surrounding areas).

You can explore our home equity loan and HELOC rates on our website! We think you’ll find we’re one of the best lenders around.

Get started! Apply for a Home Equity Loan or HELOC today!

We offer home equity loans and HELOCs. Want more information about either one?

• Visit our Home Equity Loan page and click Appy Now to request details about the process.
• Find a branch near you and talk to us in person.
• Call us: (330) 253-9197
• Or send us an email: support@buckeyecu.org

Not a member? Not a problem! Find out if you’re eligible to join. From there, we can help you establish membership in just a few simple steps. You’ll be glad you did!