As real estate values have risen and stabilized, many homeowners are accessing equity in their homes through second mortgages to consolidate bills, pay for college or fund home improvement projects, including solar technology. As with anything, there are benefits and potential pitfalls for all home equity options. .
Home equity is the difference between the value of your home and what you owe on the mortgage. Lenders offer options for qualified homeowners to access this capital through equity loans and lines of credit. They’re more cautiously and properly approved than in days before the real estate crash and can be a great option for families to consider.
An equity loan is a fixed rate product, most often for 5-20 year terms at rates higher than a conventional first mortgage. The monthly payment included principal and interest and pays down to a $0 balance by the end of the loan. There’s no guesswork and is considered the most stable option. It’s perfect for homeowners that need immediate access to the entire amount borrowed, and as a fixed payment that can’t change, is the safest when planning a monthly budget.
A home equity line of credit (HELOC) offers more flexibility but should be considered with more caution. Basically like a checkbook with a pre-approved maximum loan amount, a HELOC allows a homeowner to access funds up to a set limit. The required monthly payment is based upon the outstanding balance, and for the first 10 years of the loan, can be as little as just the interest charges (interest-only) but the homeowner always has the option of paying more, which is deducted from the balance. The interest rate charged is tied to the Prime Rate (currently 3.25% - a historical low), which can adjust at any time.
A HELOC is often the favored option when the money is being used for a short term project or is being paid back quickly. As the balance is repaid, it can be borrowed again, like credit card. Many homeowners look to consolidate higher-interest credit card balances on their home equity line of credit, as the payment is lower and the balance can be paid off quicker. HELOC’s are a great way to finance home improvement projects, especially those that can create increased home value, like solar panels or energy efficient upgrades.
"Installing a Solar PV is a terrific choice because in addition to help saving the earth, you will benefit from sustantial savings," says Sammy Chu, Vice President of Business Development of Powersmith Home Energy Solutions. "This investment can be seen in the ample increase in the resale value of your home."
As with any home financing, it’s important to get all the details to determine the best and safest options. Contact your Contour Home Mortgage representative today to see what’s best for you.