There are two types of home equity loans: closed-end loans and lines of credit. These are also known as “second mortgages” because they’re secured by your original first mortgage.

Both the home equity loan or the home equity line of credit (HELOC) are based on the home equity of your mortgage. To find out how much equity you have built on your property, you must calculate the difference between the appraised value of your home and the amount of money you owe on your mortgage. The more equity you have, the more financing options may be available to you.

“For instance, if you have equity in your home and you want to buy another property, you can take the equity out of your first mortgage and buy the other house by using a home equity loan,” says Julia Romero, Branch Manager at Center State Bank. Therefore, a home equity loan provides a lump-sum withdrawal that may be more suitable for your situation.

Additionally, a home equity loan, sometimes called a term loan, is a one-time lump sum that is paid off over a set amount of time, with a fixed interest rate and the same payments each month. The best-case scenarios for this kind of loan are property purchases or money for special occasions like your daughter’s wedding next month, when you know how much you need and the exact time it will take you to pay it off.

On the other hand, “If you want to do the new roof on your house because it got damaged during the hurricane, or you want to put in those brand-new floors, or you want to redo the bathroom, the home equity line of credit works perfectly,” explains Julia Romero.  “A line of credit is ideal for home improvement for which you may need money over an extended period like a project that may take three years or more to finish. It gives you the flexibility to borrow the amount you need when you need it,” she added.

A HELOC works more like a credit card; you can borrow up to a certain amount for the life of the loan—a time limit set by the lender. During that time, you can withdraw money as you need it. As you pay off the balance, your credit revolves, and you can use it again. This means you can borrow again if you need to, and you can borrow as little or as much as you need throughout your draw period, up to the credit limit you establish.

The interest rates on a home equity line of credit vary and fluctuate over the life of the loan. Payments may change based on how much credit you have used and interest-rate fluctuations. According to the IRS, a bonus point—if you want to choose a line of credit over a loan—is that the interest on your HELOC may be tax-deductible if you use the money to buy, build or substantially improve your home.

“To qualify for any of these home equity loans, the customer must be a permanent U.S. resident and hold a valid social security number. The lender will usually check your credit score, employment history, and your monthly income and debts,” added Romero.

For more information and advice on the type of home equity loan to apply for, please contact Julia Romero, Branch Manager at Center State Bank at 305-252-2211.

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