Maximize your home's value: 30-year home equity loan explained

Think about the last time you left town. Remember how good it felt arriving home, walking through your own front door? Your home is where you build memories and create dreams. It's also one of the most valuable assets you own and could help you reach some life goals. 

Borrowing against your home equity could help you consolidate debt, pay for a wedding, make a big purchase, or undertake a major remodel. 

Let’s explore what could happen if you use a home equity loan to reach a goal that could improve your quality of life (and maybe even the value of your home). 

What is a home equity loan?

A home equity loan allows you to borrow against the equity you've built in your home. Equity is the difference between your home’s market value and the amount you still owe on your mortgage. You could use a home equity loan to make home improvements, consolidate debt, or cover other high-cost projects or large purchases. 

A home equity loan is a mortgage. If you’re still paying down your existing mortgage, your home equity loan would be a second mortgage. 

Home equity loan repayment term

Unlike a personal loan that may give you three to five years to repay the loan, you have up to 30 years to repay a home equity loan through Achieve. It's all about what works with your plans and your budget.

What is a HELOC?

A HELOC is a home equity line of credit. It’s a type of home equity loan that offers more flexibility. 

After the loan is approved, a HELOC starts with a draw period. This is a few years when you can borrow, repay, and borrow more, up to your credit limit, as often as you like. 

You might not have to borrow the full amount when you’re approved for a HELOC. Most lenders have a minimum initial draw (the amount you have to borrow when your loan is first approved). This minimum could be anywhere from a few thousand dollars to the full amount that you’re approved for.

After the draw period, you’ll enter the repayment period. At this point, you can’t borrow any more. Your payments will be calculated to fully pay off your loan by the end of your repayment period. The repayment period is typically between 10 and 30 years.

Is the home equity loan through Achieve fixed-rate or variable-rate?

The home equity loan through Achieve is a fixed-rate home equity line of credit (HELOC). Most HELOCs have a variable interest rate that converts to a fixed rate when repayment begins, but with the Achieve HELOC, the interest rate is fixed from Day One, just like any fixed-rate loan. That means you go in knowing exactly how much interest you're going to pay, and it won’t change for the life of the loan.

Why a fixed-rate HELOC is better than a typical home equity loan

A fixed interest rate is more predictable than a variable interest rate, and you won’t be subject to fluctuations in the interest rate as market conditions change.

How much does a home equity loan cost?

A home equity loan is a mortgage and has associated closing costs and fees. These include origination fees, appraisal fees, and underwriting fees. Closing costs could range from 2% to 5% of your loan amount. If you borrow $100,000, for example, you could expect closing costs to run anywhere between $2,000 and $5,000. 

Make the most of your home with a home equity loan

Let's say you own a three-bedroom, one-bath home in a good neighborhood. You like your kid's school, enjoy your neighbors, and have a vision of what your home could look like if you had the cash. That's where a home equity loan could come into play. If you qualify, you could borrow against the equity in your property to make improvements to your home. 

You could add a bathroom or remodel the kitchen. You might finish the basement, build a beautiful deck, or add a new fire-resistant roof. 

Any of these projects could improve your quality of life and make you happier. And as a bonus, these upgrades could increase the value of your home. 

You could have up to 30 years to repay the loan. Or you could choose to pay it off sooner. For example, if your current mortgage will be paid off in 20 years, you could set up a repayment plan that would let you pay off your home equity loan at the same time. Be sure to choose a lender that doesn’t charge a prepayment penalty, or paying your loan off early could incur a fee.

How much could you borrow with a home equity loan?

How much you could borrow with a home equity loan depends on the amount of home equity you have in your home and your financial situation. 

It’s easy to figure out how much equity you have. Here's the formula: 

Your home's current value minus the amount you owe on your mortgage. 

Let's say your home is worth $400,000, and you have a $70,000 mortgage balance. You have $330,000 in equity. 

That doesn't mean you can borrow the entire $330,000, though. The next step depends on the lender you work with. 

Loan limits

Lenders have a combined loan-to-value limit and a dollar limit on home equity loans. The dollar limit is straightforward. It’s the biggest amount of money they’ll lend.

The combined loan-to-value limit, or CLTV, is the most they will let you owe on your home. This includes your primary mortgage and the new home equity loan you want. 

At $70,000, your current CLTV is only 17.5%, which leaves plenty of room for a home equity loan.

If the lender’s LTV limit is 80%, that means your mortgage and home equity loan together can’t total more than $320,000.

You already owe $70,000, so your home equity loan limit would be $250,000.

What does it take to get a home equity loan? 

As with any loan, you'll go through a loan eligibility process. For most lenders, the steps to get a home equity loan are:

• Determine how much equity you have in your home. Lenders typically determine your home’s value by doing an online or in-person appraisal. 

• Submit an application that includes information about your income, debts, and credit history. The lender will review your other debts and verify your income, to make sure you can afford to repay the loan. They may have a minimum credit score requirement. 

• Wait for loan approval.

• Receive and sign loan documents.

• Receive loan proceeds.

• Begin repaying the loan.

Home equity loan interest rates, monthly payments, and tax implications 

When it comes to borrowing money, it's all about the details.

• Interest rate: The rate you'll pay on a home equity loan or HELOC depends on several factors, including the current rate at the time you close on the loan and the overall health of your credit history. Typically, the higher your credit score, the lower your rate.

• Monthly payment: The amount you borrow, interest rate, and term of your loan all affect your monthly payment. For example, if you owe $75,000 with an APR of 10.50% and carry the loan for 30 years, your monthly payment will be around $696.

• Income tax implication: The interest you pay on a home equity loan may be tax deductible in 2024 and 2025 as long as the funds were used to buy, build, or improve a home and you itemize your deductions. After that, the interest may be tax deductible no matter how you use the loan funds. Consult with a qualified tax professional.

30-year home equity loan advantages and risks

A home equity loan or HELOC is secured debt. That means your home acts as collateral. Collateral is something of value that you pledge as a guarantee that you’ll repay the loan. It lowers the risk for the lender. In the event you don't make payments, the lender has the right to repossess your collateral (in this case, your home), sell it, and recoup its losses. That's the risk involved. 

Let's flip that coin and look at the other side:

• You may be able to deduct the interest on your federal tax return. 

• You control how much you borrow. If you choose a HELOC, you could start by drawing only the amount you need and not the full approved loan amount, with the option to borrow more later if you need it and you can afford the payments.

• You could increase your home’s value. Using your home equity to make improvements and repairs to your home could increase its overall value, helping you build more equity. 

A home equity loan could make all the difference to a homeowner with a vision for improving their home. However, it's important to consider the loan from every angle before deciding it's right for you. Ask yourself questions like these:

• Do I have enough in an emergency fund to cover expenses if I lose my job or get sick?

• Do I plan to stay in the home long enough to enjoy the upgrades and allow equity to rebuild?

• Do I have any other big plans in the works, like traveling the world or going back to school?

The answers to these questions are highly personal. If you decide to move forward, shop around to find the right lender and the perfect home equity loan for your needs. You'll thank yourself later.