Loan VS. Credit Line: Use you home’s equity to finance big-ticket expenses

homes0401-1By Lisa Scontras

Real estate prices on Oahu have been on the rise since 2011 — making it likely that the value of your home is up as well. As your home value appreciates, so does your equity, which unlocks access to a potential source of extra cash to use for anything from home improvements to putting your children through college.

There are two basic types of home equity products that enable you to tap into the financial power of your home’s equity. Depending on your needs, you may opt to establish a line of credit or take a lump-sum loan. Both are secured by the equity in your home, giving you access to lower interest rates and possible tax deductions*.

“Home equity products are very popular right now, since many in Hawaii have experienced an increasing equity in their homes due to the continuing rise in home prices,” says Derek Wong, Vice President of Credit Products at First Hawaiian Bank. “If you have at least $25,000 in equity on your property, you may qualify for an equity line or loan. First Hawaiian Bank accepts owner-occupant fee simple or leasehold homes, investment rental or vacation properties as collateral for these types of equity products.”

Both products offer the ability to pay for big-ticket items with a lower interest rate than most personal loans, which means lower monthly payments. Your reason for borrowing will likely determine which product is right for you. For a one-time purchase, such as buying a car, an equity loan may be what you want. Equity loans are ideal for circumstances requiring a fixed loan amount with predictable monthly payments. On the other hand, an equity line of credit is a more versatile loan — you can access your credit line at any time, simply by writing a check.

“The main difference between an equity line and loan is that with a line, you are able to continue to borrow as you pay down your balance,” says Wong. “A loan has a one-time draw that results in fixed payments for the life of the loan. Therefore, a line is better when you need flexibility or are unsure about the total amount or timing you need for your purchase or project. With a line, you will be able to draw funds multiple times as you need them, and your payment will adjust accordingly. Consider a line when doing a large remodel or paying for college tuition, since you may not know exactly how much you need up front.”

One great advantage of a credit line is that you make payments only when you’ve drawn on the funds. If you are approved for a $100,000 home equity line, but have only drawn $25,000, you pay interest only on the $25,000. Yet the full funds are available when needed.

Whether you foresee needing money for college and private-school tuition and expenses, a remodeling project at home, a photovoltaic system to reduce your energy needs, a new car, unexpected medical expenses or you just want the safety net of having funds available in an emergency fund, homeowners are relieved to be able to tap into their home equity to accomplish these more efficiently.

First Hawaiian Bank also has a way to combine the flexibility of a line of credit with the fixed rate and payments normally associated with an equity loan — it is a line of credit that you can draw funds from at a promotional rate for a limited term, with additional options to fix the rate on a portion of the balance for a longer term.

“First Hawaiian Bank offers a variety of lock options with different rates and terms,” adds Wong. “We currently have several of our best promotional offers available. It’s a great time to take advantage of these offers, since there is much uncertainty in the rate environment, and locking in a good rate for a long time can really give you peace of mind.”

Talk to your personal banker at First Hawaiian Bank to find out how much equity you might have and what type of product would work best for you.

* Consult your tax advisor

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