Money in the Walls

One of the biggest investments a person will typically make is in buying a home. Yet, aside from the security it provides, it’s a somewhat dormant investment. But a home equity loan can leverage that huge investment into cash—maybe even the purchase another property.

There are two different types of home equity loans, both of which are based on the value of the property. The most popular is a home equity line of credit, which works basically like a credit card. It has a variable interest rate on a specified dollar amount that can be borrowed for the life of the loan (usually 5 or 10 years). A traditional home equity loan works much like a second mortgage in that it’s a lump sum received up front and paid back over a set amount of time.

“When deciding which loan is best for you, you need to consider what your needs are,” said Rich Brown, a certified mortgage planner for Coltrain Funding Group in Hauppauge. “If you are planning to pay for a wedding or a remodeling project and know exactly how much money you’ll need, the home equity loan might be the right choice. If you are not sure how much money you will need and think you might need the money over time—such as for school tuition or for a remodeling project that might take some time to finish—the line of credit might be a better option.”

A home equity loan can be used for pretty much anything, like paying off high-interest credit card debt or funding college, elder care for parents and other big-ticket items. You can even use it to get that schooner you’ve had your eye on. “There’s a great deal of consumer finance options out there to fund boats, cars and motorcycles,” said Dan Kilfoil, a mortgage sales manager with Bethpage Federal Credit Union. “Sometimes people will use a home equity loan because the repayment is stretched out longer [than a typical vehicle loan].”

It can also be used to invest in the house, but there are precautions. Un- less the home is a long-term residence, it may not be worth borrowing money (and paying interest) for interior renovations because the investment most likely won’t be recouped in a sale.

“If you have a house that’s worth $300,000, it wouldn’t pay to take out a home equity loan to do a new kitchen,” said Rich McQuillan, the broker/owner of EXIT Links Realty in Rockville Centre. McQuillan explained a bank may add only 15 percent of the value of the work when appraising the home. It would mean a buyer would have to be willing to pay well above market value to cover the seller’s cost of a $35,000 kitchen.

McQuillan cautioned that getting a home equity loan might be harder than it was a decade ago. Kilfoil agreed. “Nowadays, a great credit score is in excess of 740,” Kilfoil said. “However, based on other additional criteria, you may be eligible with credit scores in the mid-600s.” Kilfoil went on to say that because of steady home values and extremely low rates, there has been an increase in people seeking home equity loans. But demand doesn’t guarantee that banks are more apt to lend.

“We’re still in a market where the banks are very careful with equity loans,” McQuillan said. “Home equity loans are the ones that lost a lot of money when the market dropped, because the equity started to vaporize.”