Interest rates are hitting new lows, which presents homeowners with a unique opportunity.

Whether you’ve been considering purchasing a bigger property or have already found the move-up house of your dreams, this might be the perfect time to tap into the equity of your existing home to finance your next acquisition.

Maximizing Your Equity

Figuring out how much equity you have is as easy as subtracting the amount you owe from its appraised value. For example, if you currently owe $400,000 on your mortgage and your home is appraised at $700,000, your home equity is $300,000.


If you have yet to locate your desired move-up house, but you also want to take advantage of the current low interest rates and be ready for when the right house shows up on the market, consider taking out a Home Equity line of credit, or HELOC.

With a HELOC, you can borrow up to 85% of your primary home’s value, minus the amount you owe on your existing mortgage loan. To get a HELOC, you’ll typically need a debt-to-income ratio in the lower 40s or less, a credit score of 620 or higher, and your home must be worth at least 15% more than you owe. This type of loan is different from your primary mortgage in that you don’t get a lump sum. Instead, the loan acts as an on-call line of credit from which you can take out sums at any time during the withdrawal period and are only required to pay interest until the end of the term. Note, however, that the interest rate is almost always variable. Click here for more information. 

The most current (3.16.20) average HELOC rate between five top lending institutions is 4.5% for borrowers with a credit score of around 700.


If, on the other hand, you have already found your desired move-up home, you may want to consider a straight home equity loan.

The difference between a home equity loan and a HELOC is how you receive the money. With a home equity loan, you get one lump sum, while with a HELOC you have a line of credit that stays open for 10 years, and from which you can draw as needed.

A second difference is the interest rate you pay. For a HELOC, the rate is typically variable based on the prime rate which is set by the Federal Reserve. Because of this, it can move up or down. In a home equity loan, the rate is fixed. For borrowers with a credit score around 700, the current average for an equity loan is 5.5%. An additional benefit of a home equity loan is that the IRS allows you to claim the interest as a tax deduction.

Repayment of the loans is another key difference. Just like your existing mortgage, home equity loans are typically repaid during a set time period with a monthly payment that combines principal and interest and doesn’t change. On the other hand, once you’ve been approved for a HELOC, the draw period begins. During this time, any money borrowed from the line of credit is repaid each month by interest only payments, which may mean a lower monthly payment. When the draw period is over, the loan moves to the repayment period, during which time the monthly payment begins to include principal plus interest for any money borrowed, meaning the monthly payment may increase from what it was during the draw period. If the variable rate changes, the monthly payment may again increase.


Can We Help?

Be sure to consult with both your financial and tax advisors before choosing between a HELOC and a home equity loan. If needed, Julie and our team can provide you with the right references. Then, when you’re ready to move up, you can rely on our experienced to help you find and purchase your next home. 


For more information on how we can best help you with your home-buying goals, please contact Julie at 650.799.8888 or to schedule a free consultation.