{"id":1727,"date":"2023-10-11T08:27:04","date_gmt":"2023-10-11T08:27:04","guid":{"rendered":"https:\/\/first-exchange-bank.flywheelsites.com\/?p=1727"},"modified":"2024-03-18T13:08:39","modified_gmt":"2024-03-18T13:08:39","slug":"home-equity-line-of-credit-vs-personal-line-of-credit","status":"publish","type":"post","link":"https:\/\/www.firstexchangebank.com\/home-equity-line-of-credit-vs-personal-line-of-credit\/","title":{"rendered":"Home Equity Line of Credit vs. Personal Line of Credit"},"content":{"rendered":"

While interest rates on\u00a0mortgages<\/a>\u00a0and other loans remain low, house values have risen across West Virginia. For many homeowners, this signals a perfect time to cash into their home equity to fund renovations and other home building projects. When it comes to funding home projects, a\u00a0line of credit<\/a>\u00a0is often a better choice than a lump sum loan. You may have seen home equity lines of credit and personal credit lines advertised, but how do you know which line of credit is the right choice for you? At First Exchange Bank, we want to explain the difference between a HELOC vs. a personal line of credit and help you choose the right line of credit for your project.<\/p>\n

How does a home equity line of credit work?<\/h2>\n
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Often called a \u201csecond mortgage\u201d,\u00a0a home equity line of credit<\/a>\u00a0(HELOC) is a loan that uses your house as collateral just like your primary mortgage. Your home has likely recently increased in value due to nationwide increase in home prices. You should also owe less than the value of your home since you\u2019ve been steadily making mortgage payments for years. The difference in your home\u2019s current market value and the amount you owe on your mortgage is called your home equity.<\/p>\n

If your house is currently valued at $225,000 and you owe $175,000 on your mortgage, your home equity is $50,000. Of that $50,000, First Exchange Bank can lend you $27,500 on a new home equity line of credit. Unlike a loan, a line of credit acts like a credit card with a spending limit. Instead of receiving the full sum at once, you use the loan in pieces as expenses arise. If a bank grants you a $27,500 HELOC, you can withdraw $5,000 for Project A now, $7,000 for Project B in three months, and so on.<\/p>\n

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While interest rates on\u00a0mortgages<\/a>\u00a0and other loans remain low, house values have risen across West Virginia. For many homeowners, this signals a perfect time to cash into their home equity to fund renovations and other home building projects. When it comes to funding home projects, a\u00a0line of credit<\/a>\u00a0is often a better choice than a lump sum loan. You may have seen home equity lines of credit and personal credit lines advertised, but how do you know which line of credit is the right choice for you? At First Exchange Bank, we want to explain the difference between a HELOC vs. a personal line of credit and help you choose the right line of credit for your project.<\/p>\n

How does a home equity line of credit work?<\/h2>\n
\n

Often called a \u201csecond mortgage\u201d,\u00a0a home equity line of credit<\/a>\u00a0(HELOC) is a loan that uses your house as collateral just like your primary mortgage. Your home has likely recently increased in value due to nationwide increase in home prices. You should also owe less than the value of your home since you\u2019ve been steadily making mortgage payments for years. The difference in your home\u2019s current market value and the amount you owe on your mortgage is called your home equity.<\/p>\n

If your house is currently valued at $225,000 and you owe $175,000 on your mortgage, your home equity is $50,000. Of that $50,000, First Exchange Bank can lend you $27,500 on a new home equity line of credit. Unlike a loan, a line of credit acts like a credit card with a spending limit. Instead of receiving the full sum at once, you use the loan in pieces as expenses arise. If a bank grants you a $27,500 HELOC, you can withdraw $5,000 for Project A now, $7,000 for Project B in three months, and so on.<\/p>\n

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Do I Qualify for a Home Equity Line of Credit?<\/h2>\n

Just like your mortgage, a HELOC is a home loan that uses your house as collateral. If you stop making payments on either your mortgage or your HELOC, the bank can seize your home and sell it to recoup their investment. Lenders are going to look at your Combined Loan to Value Ratio (CLTV) before extending a loan offer. Your CLTV ratio is calculated by adding the balance on your current mortgage to the new amount you wish to borrow then dividing the total loan amount by the current appraised value of your home.<\/p>\n

For example, if you owe $175,000 on your mortgage and want to borrow an additional $30,00, your combined loan amount would be $250,000. If your home is currently appraised at $250,000, your CLTV ratio is $205,000 divided by $250,000 which equals 82 percent. Most banks prefer to issue loans with a CLTV of less than 80 percent. However at First Exchange Bank, we can issue loans with a CLTV of 90 percent! Any higher than that and the loan application may be denied.<\/p>\n

There are many other factors that will go into approving your HELOC. At First Exchange Bank, we look at credit score, debt to income, and overall payment history.<\/p>\n

Is interest on Home Equity Lines of Credit Tax Deductible?<\/h2>\n

Generally, interest on Home Equity Lines of Credit is tax deductible. We recommend that you consult with your tax professional to determine if the interest is tax deductible.<\/p>\n

What Are The Interest Rates On A HELOC?<\/h2>\n

The annual percentage rate (APR) you pay on a home equity line of credit is typically lower than that on a credit card or personal loan. Instead of locking in a guaranteed rate until the loan is paid off, the amount of interest you pay fluctuates as interest rates rise and fall. The variable rate of your loan is based on the benchmark prime rate. In general, HELOCs usually have a 30-year lifespan. You have ten years to draw money from the credit line and twenty years to repay the total amount borrowed. At First Exchange Bank, our HELOC’s have a 25-year life, ten year draw period, and fifteen year repayment period.<\/p>\n

What Are The Pros And Cons Of A Home Equity Line Of Credit?<\/h2>\n

Advantages of a HELOC<\/h2>\n