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Home Equity Loan vs. Home Equity Line of Credit

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Looking to borrow against the equity in your home? Maybe you have heard the terms home equity loan and home equity line of credit (HELOC) before and wondered what the difference really is. This article will compare the two types of borrowing and take you through the pros and cons of each one.

Home equity loan vs. HELOC: What’s the difference?

Home equity loan. With a home equity loan, you borrow a lump sum of cash using the value in your home as collateral. The loan will have a fixed schedule for repayment, usually lasting between 5 and 15 years. They often have a fixed interest rate as well, though adjustable rate versions are available.

HELOC. A home equity line of credit, or HELOC, is an ongoing line of credit that’s backed by your home’s equity — think of it a bit like a credit card. Your bank will authorize a certain dollar amount (similar to a credit card’s credit limit) and period of time during which you can access the line of credit, known as the draw period. Within this time, you borrow only what you need as you need it, though some banks do set a minimum withdrawal. You can make interest-only payments only on the amount you choose to borrow or pay more to start contributing towards the principle.

Next comes the repayment period, where you can’t take out any new funds and need to start repaying the amount you’ve borrowed, if you have not already. Interest rates on HELOCs are variable and often pegged to the prime interest rate.

Comparing home equity loans and lines of credit

 

HELOC

Home equity loan

Interest rate

Variable

Fixed, but sometimes variable

Funds access

Withdraw funds as needed

Lump-sum disbursement

Funds use

No restrictions

No restrictions

Monthly payments

Varies, based on how much you withdraw and interest rate at the time

Fixed for the life of the loan

Closing costs

Yes, but not always

Yes

Collateral

Home equity

Home equity

The two types of borrowing do have two major things in common: They are backed by the equity in your home, and there are no restrictions on what you can do with the cash.

With both home equity loans and HELOCs, the maximum amount you can borrow varies depending on your credit and the lender, but generally tops out at 80% to 95% of the your home equity. To calculate your home equity, start with the valueof your house (from an appraisal, if available) and subtract the amount remaining on your loan. You can also use LendingTree’s home equity calculator to estimate how much you can borrow. (Disclosure: LendingTree is the parent company of MagnifyMoney.)

Since the loans are backed by your home equity, the interest rates are usually lower than for unsecured forms of credit like credit cards or personal loans.

It’s up to you what you do with the money from either type of loan. You can make improvements to your home, pay for a vacation or put your kids through college.

However, Brett Anderson, a certified financial planner and president of St. Croix Advisors, said it’s important to think carefully about borrowing against your home equity, which is likely one of your largest assets.

“Remember these are loans that need to be paid back. A home equity loan isn’t free money, even with these low interest rates,” he said.

Tax changes’ impact home equity loans and HELOCs

New laws have changed tax deductions related to home equity loans and HELOCs. From the 2018 tax year until 2026, the IRS says borrowers cannot deduct interest payments on these types of loans, “unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.”

In addition, starting in 2018, taxpayers may only deduct interest on $750,000 of qualified loans, or $375,000 for a married taxpayer filing separately. If you have a HELOC or a home equity loan and a regular mortgage, this limit applies to the combined amount of both loans. This limit is lower than it was previously.

So for example, if you take a $100,000 home equity loan and spend $75,000 on a kitchen renovation and $25,000 paying off credit card debt, only 75% of your interest payments is tax-deductible.

Randy Key, home loan specialist at Churchill Mortgage, told MagnifyMoney he’s seen interest in home equity loans and HELOCs drop after the tax changes.

Benefits and risks of a home equity loan

Given the current economic environment of rising interest rates, one of the main benefits of a home equity loan is having a fixed interest rate for the term of the loan — you get a lump sum upfront and have the same steady payment, even if the Federal Reserve continues to hike rates. That makes a home equity loan easier to budget for, said Anderson.

A home equity loan does have some drawbacks. If you already have a mortgage, you’ll have to keep track of two loans and make two seperate payments every month. A home equity loan also has the same sort of closing costs as a regular mortgage. Those costs can take their toll, especially if you aren’t looking to borrow that much money, Key said.

The rate the lender offers you for a home equity loan depends on your credit score. If your score is under 700, you’ll pay a higher rate to compensate for the risk the bank feels it’s taking on, Key said.

Benefits and risks of a HELOC

A big advantage of a HELOC is the flexibility. You get to withdraw the cash when you need it and only pay interest on the amount you use — however, be aware that most lenders require a minimum withdrawal at the closing.

HELOCs can have lower upfront costs than home equity loans, with some lenders offering to pay for closing costs. Key said if you are willing to base your line of credit off the tax appraisal value of your house, most lenders will do a HELOC without a new appraisal.

The major downside of HELOCs is that they use a variable interest rate pegged to the prime rate, which is set to go even higher this year. This means if you have a HELOC, your interest payments are going to get bigger. You’ll also need a strong credit score to qualify; according to Key, a score around 650 is often required, though it depends on the lender.

Equifax data shows that interest in HELOCs is going down, which Key attributed to both the tax changes and the rising interest rates. He said many of his customers are choosing to refinance to combine an existing first mortgage with a HELOC into one loan.

“With a rising rate market, people are seeing that HELOC rate could be 1% higher next year and thinking, ‘I have to do something about this,’” he said.

Which loan type is right for you?

When choosing between a HELOC or a home equity loan, experts say it is important to consider why you need the money: Is it a set project or a variable need?

Going with a home equity loan instead of a line of credit is usually the best choice to pay for a specific plan, like remodeling a kitchen or buying a vacation house.

“[If] you have a purpose for these dollars today, and you know the amount you’ll need, a home equity loan might be a better alternative,” Anderson said.

A HELOC is generally a better choice if you need some added cash but not a fixed amount or fixed timeline. Key recommends them for customers looking to cover “a tight month in the budget or maybe they are investors who want to be able to tap money quickly.”

The third option: a cash-out refinance

If you are considering a home equity loan or a HELOC, you might want to look at a third option: a cash-out refinance.

A cash-out refinance is designed to improve on the terms of an existing mortgage and provide additional cash at the same time. You’ll be refinancing and taking equity out your home at the same time, leading to one new loan with a larger balance than your previous one.

A cash-out refinance is a good option if you need money and at the same time want to improve the terms of your current mortgage by securing a better interest rate or converting an adjustable-rate mortgage to a fixed-rate one. But be mindful of the fees involved, which can be high depending on the circumstances.

Key has recommended these to a lot of borrowers at the moment who need big chunk of cash for a project like a renovation or putting a pool. With interest rates heading higher, he said, if a borrower needs $100,000 to $300,000, “a HELOC is not a good place to park that much in debt.”

Closing thoughts

Any decision to borrow against the equity in your home should not be taken lightly. The overall volume of both home equity loans and HELOCs has declined since the 2008 financial crisis, when falling property prices burned some borrowers who had borrowed too much against the equity of their homes.

If you need cash and choose to use your home as collateral, a home equity loan is generally the best choice for financing a project with a set cost. A HELOC provides more flexible access to money, but rising interest rates will make these a more expensive choice in the coming year. It’s also worth considering a cash-out refinance, which could potentially improve the terms of your current mortgage while also giving you extra cash to spend.

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Maine First-Time Homebuyer Programs

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Do you want to live in a state with gorgeous seaside views and fresh lobster? Maine just might be the right place. Whether you’re new to the state or already call it home, if you need help coming up with a down payment, Maine offers several programs designed to help first-time homebuyers make their homeowning dreams a reality.In January of 2019, we researched first-time homebuyer programs in Maine, which included a review of the Maine State Housing Authority website and other state resources. Here’s what first-time homebuyers in Maine need to know.

Maine first-time homebuyer programs

The Maine State Housing Authority administers several federal and statewide programs aimed at providing affordable homeownership for Maine residents.

Their programs provide fixed-rate mortgages and assistance with down payments and closing costs to help put homeownership within reach. Their mortgages also come with payment protection, in the event that buyers face unemployment.

Eligibility for Maine assistance

Homebuyers who wish to take advantage of one of the Maine assistance programs must meet income and purchase-price limitations. Income and purchase-price limits vary, depending on how many people live in your household and the county in which you buy a home. You can find a list of current income and purchase-price limits online.

Eligible properties include new and existing single-family homes, owner-occupied two- to four-unit apartment buildings and condominiums. Manufactured homes located on owned land and built within the last 20 years are also eligible. However, the purchase-price limit for single-wide and double-wide manufactured homes is $150,000.

MaineHousing First Home Loan Program

The MaineHousing First Home Loan Program provides low fixed-interest-rate mortgages with low or no down payments. It can also provide up to $3,500 in assistance with down payments and closing costs.

Features

The First Home Loan Program offers

  • Thirty-year fixed-rate mortgages
  • Low or no down payments
  • Up to $3,500 in down payment and closing cost assistance
  • Low fixed interest rates
  • Low- and no-point options
  • The option to finance between $500 and $35,000 for necessary home improvements in the same loan

Eligibility

In order to participate in the program, you must

  • Have a minimum credit score of 640.
  • Take an approved homebuyer education class before closing if you take advantage of the down payment and closing cost assistance option.
  • Contribute at least 1% of the loan toward the purchase price of your home (the cost of the homebuyer education class counts toward this 1%).
  • Be a first-time homebuyer (not have owned a home within the past three years) or a veteran, retired military or on qualified Active Duty.
  • Meet household income limits, which vary by county and household size.

How it works

The First Home Loan Program is available through a network of approved banks, credit unions and mortgage companies. You can begin the application process by contacting one of more than 40 approved lenders. The lender can help you determine how much home you can afford, decide on the right mortgage program and take you through the process of applying for and closing on the loan.

Learn more

MaineHousing Salute ME & Salute Home Again programs

The Salute ME and Salute Home Again programs help qualified active duty, veterans and retired military personnel achieve homeownership by giving them a 0.25% discount on First Home Loan mortgages.

Features

The Salute ME and Salute Home Again programs offer

  • An additional 0.25% discount on 30-year mortgages offered through the First Home Loan Program
  • Low or no down payments
  • Up to $3,500 in down payment and closing cost assistance
  • Low fixed interest rates
  • Low- and no-point options
  • Option to finance between $500 and $35,000 for necessary home improvements in the same loan

Eligibility

In order to participate in the programs, you must

  • Take an approved homebuyer education class prior to closing if you take advantage of the down payment and closing cost assistance option.
  • Have a minimum credit score of 640.
  • Be on active duty or have been honorably discharged from military service, have served on active duty for 180 days or within a war zone.
  • Use your new home as a primary residence.
  • Meet household income and purchase-price limits, which vary by county and household size.

How it works

MaineHousing programs are available through a network of approved banks, credit unions and mortgage companies. You can begin the application process by contacting one of more than 40 approved lenders. The lender can help you determine how much home you can afford, decide on the right mortgage program and take you through the process of applying for and closing on the loan.

MaineHousing Mobile Home Self-Insured Program

The MaineHousing Mobile Home Self-Insured Program allows manufactured/mobile home buyers to get higher loan-to-value (LTV) mortgages and pay a higher interest rate instead of mortgage insurance premiums (MIPs).

Features

The Mobile Home Self-Insured Program offers

  • Up to 30-year loan terms
  • Down payments as low as 5%
  • Up to $3,500 in down payment and closing cost assistance
  • The option that 3% of the purchase price may come from a seller contribution
  • The option to add up to $35,000 to the loan for repairs

Eligibility

In order to participate in the program, you must

  • Be a first-time homebuyer (not have owned a home in the past three years), have only owned an unattached manufactured/mobile home on leased land, or be a veteran.
  • Pay a maximum of 33% of your income toward housing and have a maximum total debt-to-income (DTI) ratio of 41%.
  • Have a minimum credit score of 640.
  • Meet income limits, which vary by county and household size.
  • Have a maximum purchase price of $150,000.
  • Purchase a single-wide or double-wide manufactured home that is less than 20 years of age and is permanently attached per code at the time of closing.
  • Move into the home as your main residence.
  • Not use more than 15% of the home for a trade or business.
  • Contribute a minimum of 3% toward the purchase of the home.

How it works

MaineHousing programs are available through a network of approved banks, credit unions and mortgage companies. You can begin the application process by contacting one of more than 40 approved lenders. The lender can help you determine how much home you can afford, decide on the right mortgage program, and take you through the process of applying for and closing on the loan.

National first-time homebuyer programs

If you want to buy a home in Maine, you’re not limited to first-time homebuyer programs available through the Maine State Housing Authority. There are other federal programs available to help first-time homebuyers across the country. If you’re interested in learning about national programs, start by checking out LendingTree’s guide to first-time homebuyer programs nationwide.

This article contains links to LendingTree, our parent company.  The information in this article is accurate as of the date of publishing.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Janet Berry-Johnson
Janet Berry-Johnson |

Janet Berry-Johnson is a writer at MagnifyMoney. You can email Janet here

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Rhode Island First-Time Homebuyer Programs

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Buying a new home is a scary prospect — and not just because change can be overwhelming. Figuring out how to afford a down payment, closing costs and monthly mortgage payments can feel like an Olympic gymnastics routine. Luckily, first-time homebuyers in Rhode Island have several programs that can provide assistance.

Whether you’re looking to pay less in taxes or you need help covering a down payment, the state’s solutions may be able to help you. We reviewed the state’s offerings to help you pick the best program for you.

Rhode Island first-time homebuyer programs

Rhode Island Housing offers affordable housing programs designed to make living in the state more attractive and affordable — no matter your financial situation. Not sure how to start your homebuying journey? The organization offers first-time homebuyer education for all buyers to help you understand the ins and outs of this complicated process.

But there’s real money available, too. The programs below offer down payment assistance, tax credits and affordable mortgages. They can even help you avoid paying mortgage insurance.

Eligibility for Rhode Island assistance

All of Rhode Island Housing’s first-time homebuyer programs — except for the First Down Program — require purchasing a house that costs no more than $441,176. Your new home can be a one- to four-unit home or a condominium.

And, of course, you must be a first-time homebuyer.

FirstHomes100

What is it?

Rhode Island Housing’s FirstHomes100 program helps first-time homebuyers at any income level afford a new place. The program combines a traditional mortgage with down payment assistance funds so you can finance your home 100%.

The FirstHomes100 program offers first-time homebuyers

  • One hundred percent financing
  • Assistance with down payment or closing costs through low-interest, 15-year loans
  • The ability to forego mortgage insurance in exchange for a slightly higher interest rate.

Requirements

In order to qualify for the FirstHomes100 program, you must

  • Purchase a house that costs no more than $441,176.
  • Buy a one- to four-unit single-family home or a condominium.

How to apply

If your income is less than $93,623 for a one- or two-person household, or less than $107,667 for a household of three or more, you’ll need to work directly with Rhode Island Housing’s Loan Center. Homebuyers with higher incomes can contact any participating lender to begin the loan application process.

Learn more

FirstHomes100+

What is it?

FirstHomes100+ is the sister program of FirstHomes100. It allows first-time homebuyers to not just purchase but also renovate the home of their dreams. Once buyers are approved for a FirstHomes100 mortgage, they’ll work with a consultant from the U.S. Department of Housing and Urban Development (HUD) to determine what repairs are needed. Once the final costs are determined, and if they exceed $5,000, the loan will become an all-inclusive FirstHomes100+ loan.

FirstHomes100+ provides buyers with

  • One hundred percent financing to buy and renovate the home of their choice.
  • Assistance with down payment or closing costs through low-interest, 15-year loans.
  • The ability to forego mortgage insurance in exchange for a slightly higher interest rate.

Eligibility

To be eligible for FirstHomes100+, first-time buyers must

  • Purchase a house that costs no more than $441,176 and that requires a minimum of $5,000 in renovations.
  • But a one- to four-unit single-family home or a condominium.
  • Complete FHA 203(k) Homebuyer Education before closing.

How it works

Buyers with incomes of less than $93,623 for a one- or two-person household or less than $107,667 for a household with three or more people will work directly with Rhode Island Housing’s Loan Center. If your income is higher, you can contact any participating lender to apply for the program directly through them.

Learn more

FirstHomes Tax Credit

What is it?

The FirstHomes Tax Credit is a federal tax credit for part of the mortgage interest you pay in a given year. A tax credit directly reduces the tax amount you owe. You can claim the tax credit every year, making this program helpful for years to come. Reduce your taxes even further by itemizing and deducting any other mortgage interest you’ve paid.

The FirstHomes Tax Credit offers buyers

  • A mortgage credit certificate for 20% of the total mortgage interest you pay each year.
  • Maximum credit of $2,000 a year.

Requirements

To be eligible for the FirstHomes Tax Credit, buyers must

  • Purchase a house that costs no more than $441,176.
  • Be buying a one- to four-unit home or a condominium.
  • Plan to live in the home as their primary residence.
  • Have income of less than $93,623 for a one- or two-person household, or less than $107,667 for a household of three or more.
  • You don’t have to be a first-time homebuyer if you live in the federally targeted areas of Central Falls, Pawtucket, Providence and Woonsocket.

How to apply

Ready to get started? Get in touch with Rhode Island Housing’s Loan Center or reach out to any of the approved lenders.

Learn more

First Down Program

What is it?

The First Down Program helps first-time homebuyers in the counties most affected by the recent foreclosure crisis. Through this program, buyers receive down payment assistance in the form of a second mortgage. As long as you live in the house full-time for five years, the assistance is forgiven. If you sell, refinance or no longer use the property as your primary residence, you’ll need to repay part of the loan.

The First Down Program offers buyers

  • A forgivable down payment assistance loan of $7,500.

Requirements

To be eligible for this down payment assistance program, first-time buyers must

  • Treat the home as their primary residence.
  • Purchase a home that costs no more than $454,250.
  • Be buying a one-to-four-unit home or condo.
  • Live in Cranston, Pawtucket, Providence, Warwick or Woonsocket counties.
  • Have income of less than $93,623 for a one- or two-person household, or less than $107,667 for a household with three or more people.

How to apply

Funds for this program are limited. Reach out to Rhode Island Housing’s Loan Center or a participating lender to get started.

Learn more

National first-time homebuyer programs

Rhode Island offers several helpful programs for first-time homebuyers, but buyers in the state should consider looking to nationwide programs, too. These programs can help you find an affordable mortgage, down payment and closing cost assistance, and federal tax credits.

LendingTree’s guide to first-time homebuyer programs can help you find the solution that works best for you.

This article contains links to LendingTree, our parent company.  The information in this article is accurate as of the date of publishing.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jamie Wiebe
Jamie Wiebe |

Jamie Wiebe is a writer at MagnifyMoney. You can email Jamie here

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