Equity Loans - A Powerful Financial Tool
equity you have in your home can be a powerful tool in managing your
overall financial situation. Your equity, the value of your home minus
your existing mortgage, can serve as collateral for additional borrowing.
of Home Equity Loans
Convenience - It easy to apply and the approval processes can
be fast. The process is often simpler than if you were applying for
a new mortgage. Once you are approved, the commitment acts like a line
of credit. You do not have to borrow it all at once.
Interest rates - The interest rates charged on home equity loans
are usually greater than those on first mortgages but less than those
on credit cards. Often, you are only required to pay the monthly interest
with the principal to be paid later.
Tax benefits - For many individuals that itemize their tax deductions,
the interest paid on home equity loans can help save some income taxes.
There are some limits on this type of interest deduction so consult
with your tax advisor for more details.
Flexible uses - Even though you are borrowing against your house,
there is no requirement that the money be used on your house. A home
equity loan can be the source of funds for paying off credit card balances,
college tuition or even to buy a car.
How does a home
equity loan work?
You may get a special check or have a "line of credit" that
you can access as "overdraft protection" against your checking
account. There are usually forms to sign and an approval process that
is not too difficult. There may be some form of commitment fee.
amount you can borrow depends on the amount of equity in your home and
your other credit characteristics. A general rule of thumb is that you
may be able to borrow up to an amount so the total debt against your
home (including the first mortgage and any other loans where your home
is pledged as collateral) is less than 75% or 80% of the current value
of your home.
interest rate charged will usually be variable and will be tied to some
published index, like the prime rate. Be sure to check out the rate
you repay the loan in regular installments and with minimum repayments
required. With some home equity loans, the minimum payments may only
be the interest on the loan and you may be required to repay the loan
at a certain date.
of the risks
Borrowing against the equity in your home should be considered carefully.
Even though there are benefits, these types of loans are like other
loans - you pay interest and they must be paid off. Most people use
home equity loans for "conservative" purposes and avoid making
risky investments or extravagant spending with the proceeds.
and understand all the details before signing. Loan documents can be
confusing and the easy process of getting this type of loan can mask
the costs and risks.