7 Questions to Ask Before Taking Out a Home Equity Line or Loan

There are a number of reasons why a homeowner might decide to take out a home equity line of credit or a home equity loan. Seven questions to ask yourself to determine if one of these options makes sense for you and your family:

Are you trying to consolidate debt to lower your total monthly payments? Reduce your mortgage term while gaining flexibility? Get access to accumulated equity?  Knowing your ultimate goal and discussing your plans with a trusted financial advisor can help you determine what terms and interest rates to look for or if another financial product makes more sense for your needs.

You can find out approximately what your home is worth by checking out the sale prices of comparable homes in your neighborhood using online tools such as Zillow, Redfin and Realtor.com. It is important to note that these resources will give you an approximate value. During the application process for a home equity line of credit or loan, lenders like Rockland Trust will order a valuation to determine the home's final value. 

The equity in your home is the value minus the outstanding mortgage balance and other loans that use the house as collateral. This number differs from the amount available for financing.

To determine how much equity is available to borrow, you will need to know the lender’s loan-to-value (LTV) ratio. Multiply the home value by the LTV and then subtract the outstanding mortgage balance to get the amount available to borrow. For example:

Home value: $400,000, LTV: 75%, outstanding mortgage balance $200,000
$400,000 x 75% = $300,000
$300,000 - $200,000 = $100,000 is the maximum amount of home equity financing for which you could qualify

Looking for an easier way to estimate the amount you may qualify for? Try our Home Equity Loan Calculator.

The outstanding balance of debts, like a mortgage, home equity loan or line of credit, are deducted from your equity to determine the total amount available to borrow. The value of your home must exceed any existing debts and liens plus the new amount you want to borrow. Expanding on the previous example, if the homeowner already has a $50,000 line of credit that uses the home as collateral, the maximum amount they could qualify for is $50,000 or the calculation above minus the existing line of credit.

The length of time you plan to stay in your home will help determine the appropriate product to meet your financial needs. Before finalizing a home equity line of credit or home equity loan, understand when a prepayment penalty might apply and how that factors into your financial plans.  

For any loan, it’s important to understand if the interest rate is fixed or variable. If you want to know the exact amount you need to pay on a loan each month for the entire term of the loan, a fixed-rate product may be a better fit for your lifestyle. The interest rate you qualify for depends on several factors, such as credit score and the current Prime Rate. 

A home equity loan has a fixed interest rate, which means that the interest rate and monthly loan payments remain the same during the loan term.

A home equity line of credit has a variable interest rate, meaning the interest rate may change monthly. With a home equity line of credit, you can convert the outstanding balance of the line of credit into a fixed rate/ fixed term loan at any point during the draw period, which is 10 years.  

Lenders may charge various fees on loan products, so it’s important to understand what fees may apply when comparing home equity products or offers. Some lenders may charge closing or appraisal fees, for example.

 

Talk to an Expert

If you have questions about what type of home equity product makes the most sense for your situation, you don’t need to rely on search engines alone. Our Rockland Trust banking experts are happy to help you create a plan to reach your financial goals.

Make an Appointment at Your Local Branch