If you own a home, you’ve probably built-up equity or the part of your home’s value that is yours free and clear of what you may still owe the financial institution. Home equity loans let you borrow against the value of that equity while you keep paying your original mortgage. According to the most recent Federal Reserve data, homeowners have on average approximately $300,000 in equity. Unlike stocks where shares can be sold quickly to raise cash, accessing liquidity from your home is not as fast, but there are advantages to equity loans such as lower borrowing rates compared to credit cards and other loans. Another advantage is a potential tax deduction if the equity loan is used for home improvements. When you sell stock shares you trigger taxes on gains and you also could be losing out on future gains.
Here’s How It Works:
A home equity loan is a second loan on your house, on top of your mortgage. You borrow a lump sum, using your home as collateral, and pay it back in fixed monthly payments over a set term at a fixed interest rate.
Example:
If your home is worth $400,000 and you owe $250,000 on your primary (1st) mortgage, you have $150,000 in equity. You can typically borrow up to 80% of your home’s value, so in this scenario:
Current Value: $400,000
Remaining Primary (1st) Mortgage: $250,000
Total Home Equity: $150,000 ($400,000 minus $250,000)
Lender Maximum Loan-to-Value (80% Cap): $320,000 total debt limit for a home valued at $400,000
Available Loan Amount: $70,000 maximum cash out ($320,000 limit minus $250,000 existing mortgage)
What Can You Do With a Home Equity Loan?
There are a variety of things that members use home equity loans for, below are some examples:
- Home Improvements (examples: kitchen remodel, new siding, new roof, etc.)
- Down payment for a second home
- College costs
- Debt consolidation
What Are the Risks?
Your home is on the line. Miss payments on the loan and you risk foreclosure.
Closing Costs. Expect 2-5% of the loan amount in appraisal, title, and application fees, often due upfront.
Negative Equity. If home values drop, you could owe more than your house is worth, which makes selling or refinancing difficult.
Overborrowing. A lump sum in your account is tempting. Borrow for what you planned, not extras.
How Much Can You Afford?
A common rule of personal finance: keep all your monthly debt payments (mortgage, car, credit cards, and any new loan) at or below 45% of your gross monthly income.
Example: With an annual salary of $85,000, 45% works out to about $38,250 a year, or $3,187.50 per month. That is your ceiling for ALL debt payments combined, not just a new loan.
Have questions or would like more information…
The credit union offers fixed-rate home equity loans at 5, 7, and 10-year terms at very competitive rates.
- Call our loan department at 732-484-4811 option 2
- Email: lending@merckefcu.com
- Schedule an appointment with a loan officer by clicking here.
- Check our current rates.
- Apply Now
