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Education Resources from The Muncy Bank & Trust Company

Click below to read guides, articles and educational resources designed to help you plan for your financial future and understand our banking products & services. Want to learn more? Contact The Muncy Bank & Trust today by calling 570.546.2211 or by visiting one of our locations!

How does a home equity loan work?

Posted on 2/19/2021 by Lori Strimple in loans

A home equity loan allows homeowners to use their homes as collateral for a personal loan. At Muncy Bank, we want you to know that your home equity can help you pay off medical bills, complete home repairs, or even send your child to college.

One of the perks of owning your home is the accumulation of equity. Home equity is the current value of your home minus what you owe the bank on your mortgage. As you pay down your loan principal, you owe less to the bank and own a larger portion of your home. If you’ve had your home for many years or home prices have surged in your area, you are probably sitting on a good chunk of home equity. At Muncy Bank, we want you to know that your home equity can help you pay off medical bills, complete home repairs, or even send your child to college.

A home equity loan allows homeowners to use their house as collateral for a personal loan - image of a person shaking hands with a lender

What is a home equity loan?

A home equity loan allows homeowners to use their homes as collateral for a personal loan. Since your home is already collateral on your mortgage, home equity loans are often referred to as second mortgages. Just like a traditional mortgage, failure to repay a home equity loan can result in foreclosure. The advantage of home equity loans is that you can use the funds from the loan however you need them. Some common uses of home equity loans include:

  • Home Renovations
  • Medical Bills
  • Tuition Payments
  • Emergency Repairs
  • Dream Vacations
  • Second Home Purchases

 

Common uses of home equity loans include: Home renovations/repairs, Medical expenses, Tuition payments, Dream vacations - image of person with receipts and money

Types of home equity loans

You’ll recall that your home mortgage options included fixed-rate and adjustable-rate loans. Home equity loans have options also. There are fixed-rate loans, variable-rate loans, and specialty loans called HELOCs. 

Fixed-Rate Loans

Fixed-rate loans have an unchanging interest rate. When you accept the loan, you’ll know your interest rate and monthly payment for the life of the loan. You can plan ahead and avoid any risk of increasing rates. Most fixed-rate home equity loans are repaid over various periods of time.  If you sell your home before your loan term is up, you’ll have to repay the loan early. 

Fixed-rate home equity loans are a great option if you need a lump sum of cash. Because you are using your home as collateral, the interest rate on a second mortgage will be lower than the interest rate on an unsecured personal loan. If you are paying a high-interest rate on credit card debt, a fixed rate home equity loan could be a great way to lower your monthly payments. Many other life events can leave you needing a lump sum loan. A fixed-rate home equity loan is a low-risk financial tool that can help you pay a large bill.

Variable Rate Loans

Variable-rate loans feature an interest rate that changes periodically throughout the loan to adjust to market conditions. While sometimes this can result in a lower monthly payment, you risk having your monthly payment jump dramatically if interest rates rise. Variable-rate home equity loans are not common. A similar product, the home equity line of credit (HELOC), pairs your borrowable equity with a variable interest rate to offer an interesting product for homeowners that don’t need a lump sum loan.

HELOCs

A home equity line of credit is a lot like having a credit card that leverages your home as collateral. A max loan amount is set based on your home’s value, and you are given access to that amount as you need it. If your HELOC is for $20,000, you could borrow $5,000 in May, another $8,000 in January, and $7,000 in March. You only pay interest on the amount you have borrowed. With a HELOC, you can also pay back the loan as you go and replenish your total credit amount. This sort of loan is called “revolving debt”. HELOCs can be a good option if you are paying tuition each semester or funding home renovations that take months to complete. Your interest rate may fluctuate throughout the duration of the loan, but you won’t be paying interest on more money than you currently need to borrow.

MyLine Home Equity Line of Credit

Combining the versatility of a HELOC and the stability of a fixed rate home equity loan, Muncy Bank’s MyLine HELOC offers a flexible option for utilizing your home’s equity. The MyLine is a home equity line of credit that also offers up to five fixed-rate loans. MyLine provides the freedom to access a line of credit and also lock in fixed rates and various terms available on home equity loans. It simplifies your banking by including the HELOC and loans in one loan closing and monthly payment. Our helpful Muncy Bank associates can help you decide if MyLine is right for you.

Home Equity Loan options include fixed-rate, variable-rate, and Home Equity Line of Credit  (HELOC) - Image of couple looking at paperwork

Can I use a home equity loan to buy another house?

A home equity loan is a great option when buying a second home. If you are buying an investment property that you plan to rent out for income, using your home equity can help lower your monthly costs and increase your cash flow. If you’re eyeing a vacation home in a different climate, a home equity loan can help make the purchase affordable without tapping into your retirement funds. When purchasing a second home, you can use the cash from your fixed-rate home equity loan to increase your down payment or perhaps even buy the home outright. If you plan to “flip” houses as an investment, you may consider a HELOC. Since you will be borrowing money and repaying it as your investments sell, you’ll want a revolving debt that only charges interest on the amount that’s borrowed.

How much home equity loan can I get?

While there are many factors that go into a bank’s decision to grant a loan. NerdWallet suggests that in most cases, you can borrow up to 80% of your home’s value, providing your home equity is 20% or more. This means you’ve already paid off 20% of the cost of your house. 

To get an idea of how much you could borrow in a second mortgage, take your home’s current market value and multiply it by 0.80 (80 percent). Next, subtract what you still owe on your first mortgage. For example, the calculation on a home valued at $225,000 with a remaining mortgage of $100,000 would look like this: $225,000 x 0.80 - $100,000 = $80,000. In this scenario, the homeowner likely has access to an $80,000 home equity loan. 

A home equity loan is a great option when buying a second home. If you're planning to "flip" the house a HELOC may be a better choice - Image of a person with keys and a miniature house

What is needed for a home equity loan?

As with any loan, highly qualified borrowers will get the best interest rates and some people won’t qualify at all. Everyone’s financial situation is different. Talk to the helpful mortgage lenders at Muncy Bank to see if you qualify. Some common qualifications for a home equity loan or HELOC include:

  • Credit score of 620 or higher
  • Debt-to-income ratio no higher than 43 percent
  • At least 20 percent equity in your home
  •  Documented income or other means of repaying the loan

Is home equity loan interest tax deductible?

If you plan to use your home equity loan or HELOC to buy, build, or improve your home, the IRS says your loan interest is tax-deductible. If you aren’t sure if your loan qualifies, or what you’ll need to document, be sure to reach out to a tax advisor. Since the Tax Cut and Jobs Act of 2017, interest on loan money used to pay off personal debt or other expenses is not tax-deductible. 

How to apply for a home equity loan

No bank knows you better than your community bank. When it comes time to seek a home equity loan, the trusted associates at Muncy Bank will provide personalized service that takes into account our local real estate market and your unique needs. No matter what your reason, tapping into your home equity is a simple, low-risk option for meeting your financial needs. Contact us today to learn more about home equity loans and home equity lines of credit. 

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