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July 15, 2019 Home Loans Joshua Williams

HELOC: More Than A Fancy Acronym

If you own a home, you may have heard the term HELOC. Either in a commercial, on the radio, or have seen it in an ad while scrolling through your Facebook feed, but do you know what that means?

Unlocking the Mystery

HELOC stands for Home Equity Line Of Credit. Much like a credit card, it provides you with a line of credit from which you are able to draw funds. You only pay back what you borrow, plus interest of course. A home equity loan is a similar product except there is a fixed loan amount that you borrow and then pay back. Much like a first mortgage or auto loan. Both an equity line and loan use the equity of your home as collateral. So if you do not pay back what you owe, the financial institution that funded your equity line or loan has the right to take the property.

What is Equity?

According to Merriam Webster Dictionary, in relation to finance, equity is:

The money value of property or of an interest in a property in excess of claims or liens against it.

That sure cleared it up… right? OK, let’s try a different approach. My apologies, it involves math:

Let’s say the value of your home is appraised at $250,000. You take out a mortgage to purchase your new home. That is considered a “first mortgage,” or first lienholder position on the house. We will explain lienholder positions in a moment. Simply put, equity is the difference between the value of the home and the amount you owe. That means if the value is $250,000 and you took out a mortgage for $200,000, the amount of equity you have is $50,000. You can now use that $50,000 of equity as collateral to get a HELOC, or a home equity loan.

Value of Home: $250,000

(subtract) Amount Still Owed on Mortgage: $200,000

Equity = $50,000

That covers equity products but I’m sure you’ve heard the term “sweat equity” before…so what is that? Because it sounds a little gross. Sweat equity is when you do renovations to your home yourself in order to add value to the property. Homeowners will make the improvements themselves to save money and in turn, create a larger amount of equity if the value of the home increases. Literally, sweating for value.

What is a Lien?

A lienholder (the credit union or financial institution that lent the money) places a lien (the right to keep possession of the property until the debt is paid) on your house/property in efforts to secure a successful repayment term. Pretty simple, right? Let’s make it more complicated! With mortgages, the lienholder can have a position. That means, if there is more than one lienholder, their position determines who gets paid first if you default on the loan. The mortgage you used to purchase the home is in first position so that lienholder would be paid first. If you take out an equity line of credit or loan, those lienholders would be in the second position, (these liens are given the term “second mortgage”). It is rare but there can also be a third position.

We hope this helped clear up any confusion that you may have had regarding home equity products.  If you think a HELOC or home equity loan is right for you, learn more about your options and submit an application. If you’re not sure, give us a call at 1-800-221-4020 and we’ll be happy to discuss your options.