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How to Make Smart Money Moves Using Your Home’s Equity

The soaring housing market has had many homeowners selling and cashing in on their property investments these last two years. But, some owners stayed the course and continued to watch their home’s value rise.

According to Core Logic's latest report on Homeowner Equity Insights, 2021 equity growth was the most significant annual increase recorded in its 45-year history. Home equity’s giving homeowners more flexibility to finance substantial expenses such as home renovations and college tuition, or even a chance to relieve financial burdens by consolidating high-interest debt.

Financial institutions offer home equity products to help homeowners tap into their home’s value by loaning money against the equity in the home. For instance, if your home’s value is $100,000 and you owe $50,000, you have $50,000 in home equity. The $50,000 asset sits untouched until either the home is sold or a homeowner takes out the equity upfront in the form of a loan. This is where a Home Equity Line of Credit (HELOC) or Second Mortgage comes in handy.

What’s the Advantage of Using Home Equity over Other Loans?

Since home equity loans utilize the home as collateral, they can offer lower interest rates than unsecured loans, saving the borrower thousands of dollars in interest payments over the life of the loan.

While HELOC loans and Second Mortgages work similarly, some distinct differences make choosing one over the other a matter of what works best for the borrower’s situation.

The Differences Between HELOC and Second Mortgage

A HELOC allows the borrower to take a loan against the home’s equity in the form of a revolving credit line with a variable interest rate and a loan limit that can be borrowed against as often as needed, typically within a 10-year draw period. Think of it as a line of credit that works similarly to a credit card. Your loan limit is a set amount determined when you open the account. When used, it reduces the available limit, and when payments are made, it floats the balance back to its original limit. Money can be borrowed as often as needed within the set loan limit and during the draw period. Payments fluctuate based on the interest rate and amount borrowed at the end of each billing cycle.

On the other hand, a Second Mortgage is a one-time lump-sum payment of the loan amount. For example, if you take out a Second Mortgage for $50,000, you will receive a one-time lump-sum payment of $50,000 at the time of closing. Your loan repayments will be fixed, and your interest rate will remain the same throughout the life of the loan. 

HELOC Benefits:

  • Good for when you need extra money intermittently 
  • Renewable source of funding without reapplying every time
  • Ability to manage monthly payments based on how much you borrow
  • Save more money on interest payments versus an unsecured credit card

Second Mortgage Benefits:

  • Receive funds all at once so you can cover large expenses quickly
  • Keep borrowing under control with a one-time loan
  • Easier to budget with a fixed monthly payment plan
  • Keep more of your money by paying less in interest versus an unsecured loan

When used wisely, your home’s equity can be a smart financial resource to consolidate debt, reinvest in your home, or handle large expenses responsibly with a lower-interest loan.

First Florida Credit Union has a team of lending experts who can help guide you through the process of a Home Equity Line of Credit or Second Mortgage when you’re ready. Give us a call at (800) 766-4328, ext. 5, or stop by a branch near you.

First Florida Credit Union is an Equal Housing Opportunity/Lender. We do business in accordance with Federal Fair Lending Laws.


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