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Understanding Home Equity Loans

May 11, 2022

Thinking of taking out a Home Equity but don’t know where to start? We’re here to answer your FAQs!


Home Equity Loan:

A home equity loan typically has a fixed interest rate and term, and is commonly referred to as a second mortgage. This means that you’ll take the loan for a specific period of time, and the rate and payment amount will remain the same for the entire time you have the loan.  These loans are paid out as a lump sum, and are best suited for expenses where you know the up-front cost, such as a specific home renovation project or large purchases.


Home Equity Line of Credit:

A home equity line of credit, commonly referred to as HELOC, usually has a variable interest rate based on the benchmark prime rate. These loans function as a revolving line of credit, allowing you to borrow any amount of money up to your credit limit. Instead of being paid out in one lump sum, a home equity line allows you to borrow what you need when you need it, for as long as the ‘draw period’ allows.  While TruChoice does not have a limited draw period (timeframe you are allowed to borrow from the line), many financial institutions do – this is one thing you’ll want to factor in when looking at a HELOC. HELOCs are best used for ongoing long-term expenses, such as ongoing home renovations, vacations, or use as an emergency line.

For both fixed Home Equities and HELOCs, a home appraisal is usually needed during the application process.





What can you use a home equity loan for?

Anything. Both home equity loans and home equity lines of credit can be used for anything that is important to you.  Some common uses of home equity funds include paying for home improvements, paying off high interest debt such as credit cards, covering unexpected medical expenses, and large purchases.


What is loan-to-value (LTV), and how is it calculated?

Simply put, LTV is how much you owe on your mortgage and any home equities, divided by how much your home is worth (appraised value).  So, if you have a home with an appraised value of $300k, and you owe $270k on it, you would be at 90% LTV.  The more you pay down your mortgage and any equity loans against it, the lower your LTV will become.  Likewise, taking out a home equity, or increasing your mortgage amount will raise your LTV.  The lower your LTV, the more of your home value you actually have as equity. Lenders look at LTV to make sure homeowners aren’t borrowing more than the home is worth – this helps to protect both the homeowner and the lender.


How much can you borrow for a home equity loan?

At TruChoice, a member can borrow up to 90% of the loan-to-value (LTV) of the appraised value of the home, minus any first mortgage balances.  Some financial institutions will only allow you to borrow up to 80% LTV, so it’s important to ask before you begin an application.  If you have a mortgage balance of $150,000, and your home is appraised at $300,000, you currently have an LTV of 50%.   If you were to take a home equity for $90k, that would put you at LTV of 80%.


How is the home appraisal process completed?

The home appraisal process is needed to get an accurate and updated estimated value of the home you are living in. This process helps to protect both the lender, and the borrower. Home appraisals are completed by an approved mortgage company appraiser, and the process often takes 3-4 weeks to be completed, and may cost several hundred dollars. Appraisers may do a drive-by appraisal without entering your home, or a comprehensive appraisal that includes a walk-through of the inside of your home. Appraisers will note upgrades that have been made, and condition of your home compared to other homes in your neighborhood.