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For those who need to finance a major expense like a renovation or child’s college education, home equity can often be a great source of credit to tap into. They allow homeowners to mobilize the existing equity of their property in order to borrow at a reasonably low-interest rate. In some instances, the funds may even be tax-deductible.

For homeowners who want to tap into their home equity, there are two main ways to do it. The first is through a home equity line of credit, which is more commonly referred to as a HELOC. The other option that homeowners have is to open a home equity loan account.

It bears noting that there are a lot of similarities between the two main types of home equity available.

That said, there are also important differences between HELOCs and home equity loans in York. This article is going to explore those essential differences a little further to give homeowners a better idea of what type of equity-based lending situation is right for them.

Home Equity Loans in York

Much like any original home mortgages in York, home equity lending relies on the home itself as collateral. However, should the debtor go into default, any original mortgages will take precedent when it comes to paying back lenders. As such, they are also commonly referred to as secondary mortgage loans in York.

Unlike HELOCs, this type of equity lending involves fixed interest payments for a fixed term. As such, they are generally a great option for any borrowers who are seeking out predictability in their payment schedules. Basically, these things work very much the same as they do for primary mortgages in York.

A lending institution will calculate the amount of home equity that a lender is eligible to receive based on a calculation called the combined loan-to-loan value (CLTV) ratio. The full calculation is beyond the scope of this article, but it will generally come out to about 80 - 90 percent of the property’s appraised value. From there, they will also factor in personal variables like payment and credit score history to come up with the total amount that a borrower can take out on the value of their home.

Many of the same factors will also be considered when determining the interest rate on the loan. Once the interest rate has been set, the homeowner can choose the payment plan that works for them. The terms may be from anywhere to 5 to 30 years, and they can count on a predictable and stable payment schedule throughout.

For those looking for a reliable long term perspective on their finances, this type of home equity borrowing is generally the best way to go. It allows them to easily calculate how much they will pay and not have to worry about their payment schedule vacillating on a month-to-month basis.

Home Equity Lines of Credit (HELOCs)

While home equity loan accounts in York tend to be more similar to mortgages in York, HELOCs can be compared to the type of credit that a homeowner receives with a standard credit card. Much like a home equity loan account in York, the equity is also based in the lender’s home, however, the borrower may continue to take out and pay back money against the credit loan throughout the full term.

So basically, HELOCs are not so really mortgages in York, but more so, secured lines of credit. In function, they operate much like a credit card, giving homeowners access to a revolving credit line that they can use as needed as long as they continually keep up on their payments.

The term of a basic HELOC is split into two main parts, the draw and repayment periods. The draw period refers to the term in which homeowners can withdraw funds from the credit line. Meanwhile, the repayment period is the period in which homeowners repay the money borrowed as well as any applicable interest.

Keep in mind that borrowers will still need to make payments during the initial draw period, but the amounts are often small and sometimes will only include the interest. Once the draw period ends, homeowners will not be able to withdraw any more money. During the repayment period, lenders should expect their required payment rates to rise substantially as they start paying back the principal as well as the interest.

The amount that a borrower is eligible to take out during the draw period is their credit limit, the limit of which will be determined according to similar factors as those taken into account when calculating how much can be taken on second mortgages in York. However, interest in HELOCs is calculated at a variable rate, meaning that the payments will vary from month to month. Borrowers can easily keep track of their payments using simplified tools for online banking in York.

So while the lender has more freedom as to how much they choose to take out and when they will not know the total amount that they have to pay back when taking out the HELOC. This means that HELOCs are generally preferable in situations when the lender doesn’t know exactly how much they will have to borrow or when they will need to take it out.

However, it is important that they have a sufficiently stable income that can easily absorb the month-to-month interest rate fluctuations. Since credit is revocable, it is important to note that HELOCs do not allow for the surefire access to funds that home equity loan accounts in York do.

To Sum It Up

Home equity borrowing isn’t ideal for everybody, but it can provide a valuable injection of cash at a reasonably low-interest rate. That said, to find out more about what type of home equity is ideal, the best place to turn is a local specialist in personal and business banking in York and the surrounding area to find out more.