For many homeowners, a valuable financing resource exists within the walls of their residence: home equity. By tapping into their home equity, homeowners can access financing to pay for home renovations and upgrades, make large purchases, consolidate debt, pay for educational expenses, or cover unexpected or emergency expenses. The two primary types of home equity financing are a home equity line of credit (HELOC) and a home equity loan (HELoan). 

 

Both a HELOC and a HELoan offer unique advantages and flexibility, allowing homeowners to choose the option that best suits their financial needs and goals. By gaining a clearer understanding of these two options, you can effectively leverage your home equity and make more informed financial decisions. 

 

Before delving into the details of a HELOC and HELoan, it would be beneficial to explain what home equity is. Understanding home equity is crucial because it serves as the foundation for using these financial products. 

 

Home equity represents the portion of your home that you truly own. Calculating your home equity is easy. You simply need to subtract any amounts owed on the property, such as the mortgage balance, from your home's current market value. For example, if your home is valued at $450,000 and your mortgage balance is $250,000, you have $200,000 in home equity ($450,000 - $250,000 = $200,000). 

 

Please note that home equity can fluctuate over time. Specifically, the equity you have in your home may increase or decrease due to national and local economic conditions, market demand, and interest rates. You can find an approximation of your home's value online (many websites offer home value estimates), but banks and mortgage lenders will not consider this an accurate appraisal. If you apply for a HELOC or a HELoan, a comprehensive appraisal will be conducted by a third-party home appraiser or through a valuation model. 

 

A home equity line of credit, commonly referred to as a HELOC, is a flexible borrowing option that enables homeowners to access funds based on the equity they've built in their homes. A HELOC is a revolving line of credit, meaning that as you repay the amount borrowed, money will be advanced to you, up to your pre-approved credit limit. You can then use the HELOC again when needed. 

 

The interest rate on a HELOC is variable, meaning it can change over time in response to market conditions, such as shifts in the prime rate, a benchmark interest rate that banks use to set rates for various loan products. As the prime rate increases or decreases, the HELOC interest rate adjusts accordingly. 

 

Ameris Bank makes it easy to access and use HELOC funds. If you obtain a HELOC from Ameris Bank, you will receive a HELOC card that can be used for purchases at stores, online, via telephone, or anywhere Visa® cards are accepted. Additionally, we offer pre-printed credit line checks, and you can request a credit advance at any Ameris Bank branch. 

A home equity loan (HELoan), also known as a second mortgage, is similar to a HELOC in that it allows homeowners to borrow against the equity they have built up in their home. The main difference is that a HELoan entails receiving the entire loan amount upfront in a lump sum. When you make payments on a HELoan, the amount of funding available to you does not automatically replenish like it does with a HELOC. If you require additional financing, you will need to apply for another loan product. 

 

A HELoan typically has a fixed interest rate, meaning the rate remains the same throughout the loan term. The predictability of a fixed rate can be beneficial for financial planning. It allows you to budget your monthly payments without worrying about fluctuating rates. 

 

If you are approved for a HELoan from Ameris Bank, you will receive the full amount at closing into your Ameris Bank checking or savings account. You will then make monthly payments that include both principal and interest over a specified period outlined in the loan agreement. 

 

Both a HELOC and a HELoan share similar borrowing requirements, which may vary depending on the bank or mortgage lender. To qualify for either product, you must have available equity in your home. Your equity helps your bank or mortgage lender determine your loan-to-value ratio (LTV), which is the ratio of the loan amount to the appraised value of the home. 

 

An LTV of 80% or lower is typically required to qualify for a HELOC or HELOC. To calculate the LTV ratio, let's consider a home valued at $350,000 with a mortgage balance of $250,000. The LTV ratio is calculated by dividing the amount owed on the mortgage by the appraised value of the home and then multiplying the result by 100 to express it as a percentage. In this example, the LTV is 71%: ($250,000 ÷ $350,000 x 100 = 71.42%). 

 

Next, your bank or mortgage lender will assess your debt-to-income (DTI) ratio to determine your ability to repay what you borrow. A DTI of 36% or lower is generally preferred. To calculate your DTI, divide the total of your monthly debt payments by your gross monthly income. For instance, if your monthly debt consists of $1,700 for a mortgage, $300 for a car loan, and $200 for other debts, your total monthly debt payments amount to $2,200. If your gross monthly income is $6,500, your DTI is 34% ($2,200 ÷ $6,500 = 33.84%). 

 

In addition to considering your home equity, loan-to-value ratio, and debt-to-income ratio, banks or mortgage lenders will evaluate other factors when you apply for a loan. These include your credit score, monthly income, and employment history. 

 

Every homeowner has unique financial circumstances and needs, which makes it challenging to decide between a HELOC and a HELoan. That said, there are some important considerations to keep in mind. 

 

If you're uncertain about how much money you need upfront, prefer the flexibility to borrow only when necessary, and are comfortable with variable-rate financing, a HELOC may be the best option for you. On the other hand, if you know precisely how much money you need to borrow, have a sizeable expense to cover, and want the predictability of a fixed interest rate, a HELoan could be more advantageous. 

 

Lastly, whether you choose a HELOC or HELoan, it is crucial to budget properly to ensure that you can make consistent and timely payments. Making your payments on time helps preserve your credit score, maintain your financial stability, and protect your home from the risk of foreclosure. 

 

If you have questions about home equity financing or would like to initiate the application process for a HELOC or HELoan, please contact Ameris Bank today to speak with a banker.