How to use your home's equity for a loan or line of credit in Florida
Are you a Florida homeowner looking for a way to cover a kitchen remodel, emergency medical bill, or college expenses? If so, a home equity loan may be a good option.
How much cash can you borrow through a home equity loan? Your home’s equity (the difference between the current value of your house and the amount you owe on your mortgage) will help dictate this amount. You can figure out how much you can borrow through a home equity loan in Florida with our loan amount calculator.
One of the most noteworthy advantages of home equity loans for Florida homeowners is that they can be used for virtually anything. Although, if you put your home equity loan funds towards home repairs or renovations, you may be able to deduct the interest that you pay against the loan.
Let’s dive deeper into two of the different types of home equity loans Florida homeowners can choose from: home equity loans and home equity lines of credit (HELOCs).
Home equity loans in Florida
A home equity loan can give you the chance to collect a single lump sum of cash. You’ll pay it back through fixed monthly payments over a length of time (term) that you agree on with your lender.
You may want to consider a home equity loan if you either know exactly how much money you need to borrow or if you want to receive all your funds at one time. A home equity loan can also be a great choice if you’d like to consolidate your high-interest debts and lock in one fixed, manageable monthly payment, with a lower interest rate.
Pro: Fixed Interest Rates
When you take out a home equity loan in Florida, you can generally expect a fixed interest rate. This means that you will have the same monthly payment until you finish repaying your loan. This is a major benefit of home equity loans, as home equity lines of credit often come with variable interest rates that can be difficult to budget for.
Check out the range of rates for home equity loans from Discover Home Loans® to get an idea of what rates you may be able to secure for a home equity loan in Florida or use our monthly payment calculator to build a home equity loan that fits your budget.
Con: Closing Costs and Fees
Just like your primary mortgage, a home equity loan typically requires you to pay closing costs. While closing costs depend on the lender, they often fall somewhere between 2% and 5% of the loan amount. You may also face an early termination fee if you decide to pay off your loan early. Other common fees include appraisal fees and title search fees.
HELOCs in Florida
Since a HELOC gives you the opportunity to borrow money over time up to a set credit limit, it works like a credit card. Rather than borrowing a lump sum like you would with a home equity loan, a HELOC acts as a revolving loan. Once you tap into your HELOC, you’ll pay back the amount you borrowed over time, plus interest charges against it.
A HELOC has two time periods that are important to understand. The draw period, which typically ranges from 5 to 10 years, is when you can borrow what you need and make interest-only payments. The 15 to 20-year repayment period will begin as soon as the draw period is over. During the repayment period, you’ll have to pay back the principal as well as any interest on the amount you borrowed.
Just like a credit card, a HELOC allows you to borrow as much or as little as you want within your limit. This can be an advantage, especially if you’re unsure of how much cash you need to pay for a major home improvement with ongoing costs or any other type of expense.
With a HELOC, you can also land a lower interest rate than you may be able to with a credit card or personal loan.
Con: Variable Interest Rates
Since a HELOC’s interest rate will likely be variable, it may decrease or increase over time. If the national economy’s interest rates become higher, you could end up paying a lot more for your HELOC and be left with monthly payments that are difficult to afford.
Your debt-to-income ratio (which is your debt payments divided by your gross monthly income) will be considered when a lender offers you an initial interest rate. A high credit score and low debt-to-income ratio can increase your chances of securing a lower rate.
Con: Fees & Penalties
HELOCs typically have fewer closing costs and origination fees than a home equity loan, but fees for HELOCs can include early termination fees, penalties for not meeting a minimum withdrawal amount, and fees for each time you make a withdrawal from the line of credit. Over the lifetime of a HELOC, these fees can become significant when not property managed.
HELOC interest rates, unlike home equity loan interest rates, are typically variable and depend on the national bank rate
Comparing home equity loan rates vs. HELOC rates in FloridaInterest rates for both home equity loans and HELOCs will take your credit rating, available home equity, and other financial factors into account when determining your interest rate.
The length and amount of your loan may also affect your interest rates: if you are repaying your loan within five years. At the time of this writing, initial interest rates in Florida can range from 2.63% to 6.64%. As you spread the loan out for a longer repayment term, say 15 years, you will see this interest rate range increase to about 4.75%-6.75%.
Keep in mind that HELOC interest rates, unlike home equity loan interest rates, are typically variable and depend on the national bank rate. While 2020 has a very low national bank rate, future years can increase, which could potentially push your HELOC variable rate up higher than the current average range of 4.25%-8.50%.
Overall, however, when compared with interest rates for credit cards (where the national average interest rate hovers around 16.75%) and personal unsecured loans (where high credit scores can see an average rate in Florida between 10.3% and 12.5% and low credit scores can see interest rates as high as 32% ), interest rates for home equity loans and HELOCs in Florida are generally below this, making your home’s equity a very valuable financing option.
Lock in the best home equity loan rates in Florida
Interested in a home equity loan or HELOC in the Sunshine State? Here are some tips to help you find the best home equity loan rates in Florida.
Calculate your combined-loan-to-value ratio
Generally, lenders allow you to borrow a maximum combined loan-to-value (CLTV) of 80 to 90 percent of your home's value. The combined loan-to-value refers to the total balance of all outstanding mortgages secured by your home, including your prospective home equity loan. By contrast, loan-to-value (LTV) is a simpler number that refers to the size of a loan you take out compared to the value of the property securing the loan.
To calculate CLTV, first look at your home's current value compared to all existing mortgages on the home. For example, if your home is valued at $300,000 and you owe $180,000 on your first mortgage, your total available home equity is $120,000 and your current CLTV is 60%.
Now let's say you're thinking of getting a second mortgage on the home as well. Most lenders will only lend up to 80% CLTV, which means on a $300,000 home, the maximum loan amount you can have outstanding between all mortgages on the home is $240,000. You already have a $180,000 primary mortgage, which means your maximum possible second lien amount is $60,000. In other words, in this example, you as the homeowner could tap into as much as $60,000 of your equity to use in a variety of ways. Most companies that offer home equity loans will take this CLTV calculation into account when they determine your eligibility and how much you can ultimately borrow, so it's wise to do the calculation yourself to see where you stand.