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The Vault | Home Equity Loans: a Renovator's Funding Solution

April 01, 2022

Modern Interior of a home living space

There are several ways to fund a home renovation - but a home equity loan is not always top of mind - but it might just make sense for you. Let's take a deeper look and answer some of the most popular questions out there about home equity loans.

What exactly is a Home Equity Loan?

A home equity loan is a loan secured by a home's value. This means the home serves as collateral for the loan and guarantees the funds borrowed. When borrowers take out a home equity loan, they will receive a fixed amount of cash in one lump sum. The funds can be used for anything - or more than one thing. The amount they will qualify for is calculated according to the home's loan-to-value (LTV) ratio, payment term, income and credit history. Most home equity loans, including those offered at Education First FCU, have a fixed interest rate, a fixed term and a fixed monthly payment.

Advantages of a Home Equity Loan

The primary benefit a HEL has over other loans, including the Home Equity Line of Credit (HELOC), is its fixed interest rate. This means the borrower knows exactly how much the monthly payment will be for the entire life of the loan, making budgeting for the payments easier. This is especially beneficial in an environment of rising interest rates since the borrower's loan is not subject to the increasing rates of adjustable loans. Also, the interest paid on a home equity loan is often 100% tax-deductible (consult your tax adviser for details).*

Another benefit of a home equity loan is its consistent repayment plan throughout the life of the loan. Unlike a HELOC, which often only requires payments toward the loan's interest during its first five years, borrowers will be making payments toward the loan's interest and principal throughout the life of the HEL. Some loans even allow borrowers to pay back larger sums if they choose, though many will charge a penalty for early payments. Here at Education First FCU, we allow early repayments on home equity loans without penalty.

Are there any disadvantages of a home equity loan? Regardless of the lender's policy, at the end of the loan term, the entire amount due will be paid up.

While a home equity loan offers the borrower access to the funds they need to cover home improvement projects with an affordable repayment plan, it's important to know about every aspect of a home equity loan before pursuing it as an option for a home renovation or improvement. 

The Fine Print

Taking out a home equity loan means you will  have fees associated with the loan. These may include an application fee, origination fee or processing fee. Additionally there are third party fees associated with the loan like a credit report and attorney fees. It's best to find out about these fees up front and how much they will amount to in total before applying for a loan. 

Also, when opening a home equity loan, borrowers will receive all the funds in one shot. This makes a home equity loan a great option for homeowners who know exactly what kind of work they will do on their homes and the estimated total cost for that work.

If you only have a vague idea about which renovations you'll do and how much they will cost, you may end up borrowing an insufficient amount of money. Unlike a HELOC, once the loan is taken out, there's no way to add to the amount.

Finally, you will need to make a monthly payment on the loan, regardless of your financial standing at any given time. Because a home equity loan is essentially placing a lien on your home, if you were to default you could lost your home. Because of that, borrowers should make sure they can afford the monthly payments and even have a few months of payments socked away before closing on one. 

A home equity loan is a great tool and can be a great solution for your lending needs. We're always happy to answer your questions - feel free to call, click or stop by your nearest Education First FCU branch to learn more about home equity loans and to start applying for your loan today. 

*This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

** APR = Annual Percentage Rate