Rising residential real estate values have birthed an increase in home equity for American homeowners, and many are taking advantage of this fresh source of revenue. In fact, NerdWallet reports that lenders handed out $156 billion in home equity lines of credit (HELOCs) in 2015, a 24% rise from a year earlier and a 138% rise from 2010.
Top Reasons for Borrowing Against Home Equity
The reasons for borrowing vary, with two of the most common being home improvement and debt consolidation. “What I am seeing is that home improvement tops that list. Second is college financing, and third is debt consolidation,” said Tom Becker, Hanscom FCU Senior Vice President of Lending.
NerdWallet reports that the top five reasons nationally that American homeowners tap into home equity are:
- Home improvements
- Debt consolidation
- College costs
3 Ways to Access Home Equity
There are generally three ways to access home equity: cash-out refinance, fixed-rate home equity loans, and home equity lines of credit.
With a cash-out refinance, you will be able to pay off your existing mortgage and get a cash payment for the remaining balance of the new loan. Payments and terms will be outlined for you by the lender and will function like any primary mortgage.
A fixed-rate home equity loan is also called a second mortgage. This type of loan lets you borrow one time at a fixed rate. You will pay fixed monthly or bi-weekly payments as outlined in the terms of your agreement. Because the loan is paid to you in one lump sum, this is a popular option for debt consolidation or a home remodeling project.
A home equity line of credit (HELOC) is a credit line established against the equity in your home, allowing you to borrow as needed. These loans typically have a variable rate. You draw against the available credit line, replenishing it as you repay it. Because funds repeatedly become available, this is a common option for recurring payments such as college tuition or medical bills.
While Hanscom FCU does not originate fixed-rate home equity loans, we specialize in HELOCs. Members access our HELOC expertise on a regular basis, and our blog material on the topic remains our most popular online content. For answers to the most commonly asked questions we get about HELOCs, download our free Equity Edge: Answers to Commonly Asked Questions. Consider it your homework before your home works for you.