The holidays speak of get-togethers with family and friends. It’s a time to share love, laughter, gifts, and more.
It’s also a time that bills can rack up. Sometimes Santa’s little helper comes in the form of a home equity loan. At Cornerstone Bank, our team of banking professionals understands budgets, and we know that your wallet can feel the squeeze at the worst times.
This might be a great time to use your home equity to help you get over the holiday hump. How does a home equity loan work for the holidays? Read on to find out more from your local community bank.
What is a home equity loan?
Think about what your house is worth currently as real estate. If you don’t know, check your appraised value from your property tax statements, and use that as at least a starting point. You can also contract a professional appraisal for a true current market value on your home.
Compare that value to the amount of money you might still owe. If your home is worth more than what you owe—congratulations! You’ve got home equity.
A home equity loan uses that equity as the collateral against your loan amount. Most banks allow you to use up to 85% of your equity as your loan amount.
For example, let’s say your home is worth $400,000, but you still owe $220,000 on the mortgage.
$400,000 (worth) X .85 – $220,000 (owe) = $120,000 available for HELOC.
What’s an LTV?
The loan-to-value ratio compares what’s still due on your mortgage loan to your home’s current value. Banks figure this out by dividing your loan balance by your home’s value.
For example, let’s say your home is worth $400,000, but you still owe $345,000.
Take that 345,000 in debt, divide it by the 400,000 in value, you get 86.25%. This percentage equals the amount you still owe, and the rest—13.75%–equals your equity.
The lower the LTV number, the better the odds of getting a loan on your home equity, and the less chance of having to pay PMI again, or to have your current PMI increased.
If this sounds confusing, just contact us at Cornerstone Bank and we’ll be happy to walk and talk you through the details.
What is a HELOC (home equity line of credit)?
How does a home equity loan work? Answering that also requires knowing the difference between a home equity loan vs a home equity line of credit. Where a home equity loan is a lump sum you receive immediately, a HELOC works like a credit card funded by your home’s equity.
You don’t have to use the maximum amount of your available home equity. You can apply for a smaller maximum amount of funding, or go all the way to 85%, depending on your situation. As you’ve seen above, there are requirements and details that will need to be looked at with your banker to see which amounts you may qualify for.
Also, a HELOC will have a variable interest rate, whereas a home equity loan will have a fixed interest rate.
3 Ways a Home Equity Loan Works for the Holidays
Sometimes it happens—the holidays suddenly light up the calendar with their holly jolly nearness, and we may not have prepared our pocketbooks to live up to our spirit of giving.
That’s where your home equity, that amount you’ve worked hard for, can work hard for you! Here’s how a home equity loan works to help keep things merry and bright.
A home equity loan works to fund your holiday gift-giving.
Santa got the gift list, but the elves are feeling a little lean this year. What does a family do to make sure there are squeals of delight around the tree come that festive morning?
This is when a home equity loan or line of credit can come in handy. Instead of cranking up the credit cards, your bank may be able to help you fund more ho-ho-ho with your equity dough. Gifts, food, a holiday party—you can make memories using the equity in your home.
A home equity loan works to take a holiday vacation.
When it comes to making memories, nothing says “Do you remember when??” like a family vacation. Whether it’s Christmas in Cancun, Hanukkah in Jamaica, or any other special destination for a special time, a home equity loan or line of credit can help you holiday away.
Plus a family vacation gives the best gift of all—the chance to do something together.
A home equity loan works to improve your home for the holidays.
When your home welcomes visitors, you might need a little extra room in your rooms. Maybe the kitchen needs updating so that all those cooks can make all those goodies for the feast. Or that den could be converted into a den/bedroom for extra overnight visitors.
You might even want to redo the basement so that kids and grandkids have a place to play while the rest of you catch up in your living room, and on that amazing entertainment patio out back.
Maybe you want to build a new addition to your house, because there needs to be more house for this home!
From updating your hvac, adding a better or bigger water heater to handle the demands, replacing tubs or shows, or just fixing the complete list of issues you’ve let slide for a while (hello windows, nice to see through you again!)—a home equity loan can supply the capital for those improvements.
How does a home equity loan work for your taxes? You may be able to deduct the interest on your home equity loan if you use it to buy, build, or substantially improve your home! See a tax advisor regarding deductibility of interest.
The loan must be secured by the taxpayer’s main home or second home (known as a qualified residence), and it can’t exceed the cost of the home. There may be other other requirements too, so be sure to talk to your lender about all the details.
A Few Recommendations About Holiday Funding
There are a few common sense monetary guidelines to holiday giving which might not seem so “common” when you’re in the spirit. Keep in mind:
- Don’t let emotions drive decisions. Think rationally about gift-giving in relation to your budget.
- Keep credit card debt down. These often have exorbitant interest rates.
- Budget for the following months. Holiday loans have to be repaid—make sure they don’t ruin the rest of your year.
- Start saving now for the next holiday, so that you might not need a loan.
- Set limits—and stick to them.
The biggest thing to remember: borrow responsibly and use wisely.
Other Uses for a Home Equity Loan
How does a home equity loan work for other goals? In Kansas City, we’ve discovered over the years that some of the most popular uses for a home equity loan/line of credit include:
- Funding a college education
- Buying dependable transportation
- Using the money as business capital
- Paying off high-interest credit cards
- Consolidating debt
- Paying off medical debt
How does a home equity loan work for my credit?
Much like any other loan or credit card, your payment history dictates the effect on your credit score. If you’ve had late payments, those will affect your score negatively. However, your on-time payments and proper account maintenance will reflect positively on your credit score.
As with other loan applications, when you apply for a home equity loan or HELOC, that gets listed as an inquiry. Too many inquiries can raise a red flag for lenders about possible credit issues, so you’ll not want to apply to several banks all at once.
How does a home equity loan work for selling my home?
As with any other outstanding debts on a home (besides the base mortgage), you’ll need to pay off the home equity loan either before the sale, or at the time of the sale.
If you have a HELOC, you’ll need to close that out and pay off any outstanding debt if there is any. This too can be done at closing time. Talk to your real estate agent about the best strategy to address these issues.
The home equity line of credit.
With a HELOC, you create a loan, often with a bank card, that acts like a credit card. You can spend up to the limit based on how much of your home equity value you wish to make available. A HELOC incurs a variable interest rate.
Cornerstone Bank works as your home for home equity loans.
How does a home equity line work in Kansas City? At Cornerstone Bank, it works hard for you, helping you achieve your dreams. We also pride ourselves on being a hard-working community bank, providing you with choice concierge banking services.
We believe every customer is our most valuable customer. Each and every one has made it possible for us to gain the respect of our neighbors and helped us to grow over the last two decades.
Contact us about how home equity loans work, and to create a savings plan for the holidays that achieves your goals. Your business is the gift our staff receives every day, and we want to give back all we can in service and success! Business banking, personal banking, and more. At our location, or mobile. We’re not the typical bank on every corner. We’re your Cornerstone Bank.