Home Equity Loans & Lines of Credit – Frequently Asked Questions
From Gibraltar Bank – A New Jersey Community Bank
Why is a home equity loan or home equity line of credit a good financing option?
Interest rates for home equity lines and home equity loans are typically lower than other forms of credit because your home is used as collateral, meaning the risk to a bank is less than an unsecured loan. This not only results in a lower cost to you, the interest you pay is often tax deductible.
What can I finance with a home equity line or loan?
Because of the low interest rates and potential tax advantages of home equity lines and loans, they’re a smart way to finance almost anything, including home improvements, education, purchasing a vehicle, buying a second property or consolidating higher-interest rate balances.
How do I calculate the equity in my home and how much can I borrow?
The equity in your home is the difference between the current appraised value of your home and the balance of your mortgage. For example, if your home is appraised for $400,000 and your mortgage balance is $200,000, you have $200,000 of equity in your home. ($400,000 - $200,000 = $200,000). Gibraltar Bank allows you to borrow up to a maximum loan-to-value (LTV) of 70%. To calculate the maximum line you can apply for simply multiply the appraised value of your home by 70% and deduct your mortgage balance. For example, if your home is appraised for $400,000 and your mortgage balance is $200,000, you can borrow up to a maximum of $80,000. ($400,000 x 70% = $280,000 - $200,000 = $80,000).
What is the difference between a Home Equity Loan (HEL) and a Home Equity Line of Credit (HELOC)?
Home Equity Lines and Loans are both very inexpensive ways to borrow money. They have very low interest rates because they are secured by the equity in your home and the interest is usually tax deductible.
Although both of these loans are second mortgages, with a HEL, you receive a lump sum of money, while a HELOC is a revolving line of credit. When HELOC payments are applied to the outstanding balance of your credit line, your available credit is replenished accordingly.
The interest rate on these loans works differently too. Home equity loans (HEL) have a fixed interest rate and repayments are made in monthly installments of principal and interest – but they usually carry fees and closing costs. A HELOC is a variable rate loan, which means that the interest rate can change over time, according to the prime interest rate and Gibraltar Bank guidelines.
When choosing between these loan types, ask yourself whether receiving your loan all at once or having access to a line of credit works better for you.
What is your credit rating and how it affects your home loan?
Your credit rating is a measure of the risk you pose to a lender when you borrow money. Your credit rating will help determine whether or not you qualify for a home equity loan, how much you will be charged in interest and fees, and how much you can borrow. Your credit rating is affected by your credit history, your debt-to-income ratio, your LTV ratio and your employment history.
Since your credit score is greatly affected by your credit report, it is very important to make sure there are no mistakes in the report before you submit a loan application. The following three major credit reporting agencies can help you obtain a copy of your credit report*:
Experian (formerly TRW): 888-397-3742
Trans Union: 800-916-8800
*There may be a charge for this service.
How do I access my Home Equity Line of Credit?
You can write a Home Equity check. You can also transfer funds from your HELOC to your Gibraltar Bank Savings or Checking account using our online or 24-hour telephone banking system. Or, if you prefer, you can come into our branch offices and make a withdrawal.