Using Home Equity to Your Advantage
Tapping the equity in your home – its market value, less what you owe – can allow for a wide range of financial needs, including home improvements, additions and repairs, as well as debt consolidation.
How to get your best deal
When applying for a second mortgage, many consumers are most concerned with simply the interest rate they’ll pay and the amount of their monthly note. There really is more to it than that. Remember the long list of fees that you saw during the closing of your original mortgage? You may face many of those same costs again with your home equity loan.
One of those fees you’ll encounter on your loan docs may be the listing of an interest rate and an APR. What’s the difference? The APR includes lenders fees, such as “points” (upfront fees in one percent increments, sometimes called “discount points” when used to reduce your interest rate) as well as finance charges.
NerdWallet Inside Tip: When shopping for your home equity loan you’ll be trying to track a lot of fees and expenses, and it can be overwhelming. Use this worksheet to help organize and compare each lender’s fees and to guide your information gathering process. Farmington Bank has mortgage specialists to help you understand the process.
Consider a line of credit
Rather than obtaining a cash-out lump sum home equity loan, you may want to consider a home equity line of credit (HELOC). Say you qualify for a $10,000 line of credit. With a HELOC, you will have the flexibility to access the equity in your home as you need it, usually with a credit card or line of credit checks. You only repay what you’ve drawn, along with accrued interest on the outstanding balance, rather than on the full credit line available.
Most HELOCs have variable interest rates that can impact your monthly payments, too. Be sure to know if your interest is fixed (locked-in), or adjustable (subject to change, higher or lower).
By the way, here’s a little nuance to be aware of: the APR on a home equity line of credit is the same as the interest rate, unlike home equity loans.
The right to change your mind
You may have signed on the dotted line, but you are not cornered. If your circumstances change, or even if you just change your mind, by federal law you have three days to cancel the loan or line of credit.
The cancellation has to be in writing, delivered before midnight of the third business day. And in this case, business days include Saturdays (but not Sundays or legal public holidays).
A word of caution. A second mortgage is a serious debt. If you default, you can lose your house. It’s wise to draw on your home’s equity only for high-priority financial needs.
Source: Guest Column by NerdWallet, exclusive to Farmington Bank