What Are the Types of Home Equity Loans and Lines of Credit?

As a homeowner, you have a valuable asset that can be harnessed to achieve your financial goals. Home equity loans and lines of credit offer avenues for tapping into the equity you’ve built in your property. 

Whether you need funds for home improvements, debt consolidation, or other expenses, it’s important that you understand the types of home equity loans and lines of credit available to you. In this comprehensive guide, we’ll delve into the various options, empowering you to make informed decisions about leveraging your home’s equity effectively.

What are the types of home equity loans and lines of credit?

There are a few different types of home equity options for you to choose from—fixed-rate, variable rate and conversion options. Here’s what each one holds:

Fixed-rate home equity loans

Traditional home equity loans, also known as second mortgages, are a popular choice among homeowners. When you opt for a traditional home equity loan, you receive a lump sum payment based on the available equity in your home. These loans come with fixed interest rates, fixed monthly payments, and a predetermined repayment term, typically ranging from 5 to 15 years. This structure provides predictability and stability, making it easier to plan and budget for your payments. Traditional home equity loans are ideal for one-time expenses or projects with a defined budget.

Variable-rate HELOCs

Variable-rate HELOCs are the most common type of home equity lines of credit. With a variable-rate HELOC, lenders provide you with a maximum credit limit. During a specified draw period, usually ranging from 5 to 10 years, you can access funds from the line of credit as needed. The interest rate on a variable-rate HELOC is tied to an index, such as the prime rate, and can fluctuate over time. Monthly payments during the draw period may be interest-only or include both principal and interest, depending on your preferences. Variable-rate HELOCs provide flexibility in borrowing, allowing you to withdraw funds when necessary.

HELOCs with conversion options

Some lenders offer HELOCs with conversion options, which allow borrowers to convert all or a portion of the outstanding balance into a fixed-rate loan. This feature provides flexibility, enabling borrowers to secure a fixed interest rate on a portion of their line of credit while maintaining the revolving credit aspect for other needs.

Factors to consider when choosing a home equity financing option

When evaluating home equity loans and lines of credit, there are a few important factors to keep in mind. Take a look:

Interest rates and fees: Consider whether you prefer the stability of a fixed rate or the flexibility of a variable rate. Once you’ve decided which is right for you, compare interest rates and fees among lenders to ensure you’re getting the most competitive terms.

Repayment terms and flexibility: Take a look at the repayment terms and monthly payment obligations associated with each option. Determine whether the structure aligns with your financial goals and budgetary constraints.

Qualification criteria and equity requirements: Understand the lender’s qualification criteria, such as credit score, income stability, and debt-to-income ratio. Consider the minimum equity requirement and ensure you meet the necessary threshold to qualify.

Putting it all together

Home equity loans and lines of credit provide homeowners with valuable financial tools to access the equity they’ve built in their homes. By understanding the types of home equity loans and lines of credit available, you can make informed decisions that align with your needs and goals. Consider factors such as repayment terms, interest rates, and qualification criteria when selecting the option that best suits your financial situation. Utilize your home’s equity wisely to achieve your goals and improve your overall financial well-being.

Norway Savings Bank Home Equity Loans & Lines of Credit

At Norway Savings Bank, we want to simplify the borrowing process. Our local lending experts meet you where you are, take time to understand your needs and when we’ve found the right option, make the application process fast and easy. Whether you want to add another bathroom, pay for a child’s education or fix a roof, we are here to help. Ready to get started? Check out our Home Equity page, or contact a lender.