Using the Equity in Your Home

Whether you're upgrading your home to put it on the market or you simply want to remodel to change your environment, home improvements can add significant value to your home.

But how do you afford to add a bathroom or to repaint and re-carpet the family room? Many folks opt for a home equity loan or home equity line of credit.

A home equity loan, simply put, is a second mortgage. With a home equity loan, you borrow against the equity in your home. For example, if your home is worth $150,000 and you still owe $75,000 on your mortgage, you have $75,000 in equity. A home equity loan allows you to borrow some or potentially all of that $75,000.

With a home equity loan, you'll receive a lump sum amount that you repay over a set timeframe, usually at a fixed rate of interest and requiring the same payment amount each month. Home equity loans are ideal for larger, one-time purchases when you know exactly how much money you'll need and you don't expect to need additional money in the near future.

A home equity line of credit (known as a HELOC ) is also based on the equity you've built in your home. The HELOC does not have a fixed rate of interest; the rate will change based on an index and margin that your bank sets. It works like a credit card, with a limit and a revolving balance. That means you can borrow up to your limit, pay some or all of it back, then borrow again up to your limit.

Each of these home equity products has its pros and cons. The interest rate on a home equity line of credit is generally less than on a home equity loan. However, because the rates are variable, if interest rates rise, so will your interest on a HELOC, which will increase your monthly payments. And, just like a regular credit card, you may end up paying more in interest charges if you don't pay back the loan in a timely period. The interest on a HELOC may be tax deductible and you're charged interest only on the money you borrow. Although a HELOC generally doesn't involve closing costs, it may involve other fees, such as an annual fee.

Interest on a home equity loan may be tax deductible, as well. If you plan to be paying back the loan for more than a three-year period, a home equity loan may be a better option than a HELOC. Home equity loans require closing costs and, though a home equity loan doesn't offer the flexibility of a HELOC, your loan amount, loan term, and payments are locked in so you know exactly how much you'll be paying for how long.

If you're planning to borrow money for home improvement projects this spring, talk to your banker to find out which of these products would be right for you. But remember, credit is still credit. I've written about the headache of overextending yourself with credit cards; overextending yourself with a second mortgage has much higher stakes. If you fail to pay your home equity loan, you could possibly lose your home. It's always important to use credit wisely and make sure your budget can accommodate the extra debt.

Contact your Johnson Bank personal banker for more information.

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