Building equity in your home can be a major advantage if you need to borrow money. Your equity can serve as collateral in a home equity loan, which typically offers better terms than other types of loans. With a home equity loan, you’re often able to borrow more money at lower interest rates. And, in many cases, you can deduct the interest you pay on the loan when you file your tax return*, further reducing the actual cost of borrowing. Most of the interest you pay, such as on car loans or personal loans for example, is not tax deductible.
Understanding the risk
There are two major incentives which has fueled the popularity of home equity loans:
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Low Interest Rates |
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Tax Savings |
There are still some significant risks however, when you borrow against your home. The biggest danger is that you may default, or fall behind on repayment. If this happens you could lose your home through foreclosure. That means the lender takes over the property and becomes the owner. That’s true even if you’ve made all the payments on your first, or primary, mortgage.
For that reason, most experts recommend that home equity borrowing should be used for major expenses rather than day-to-day needs. Home equity loans are frequently used to finance home improvements or pay tuition bills. If you can add loan repayment as a regular item in your budget without creating too much strain, then home equity borrowing can be a wise choice.
**Please consult your accountant or tax professional for confirmation.
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Home equity loans can be considered for a number of reasons. You may have taken advantage of the record low interest rates in the past two years and refinanced your mortgage. At the time, there was no need for additional cash. Now you find out you need a new roof, college tuition is due, your car breaks down, etc. Taking out a home equity loan, may be your best bet. It lets you keep the low interest rate you have on your first mortgage and, in many cases, you avoid the typical closing costs involved in a regular refinance.
There are two different types of loans that take advantage of the equity in your home. One is a home equity loan, the other is a home equity line of credit. A home equity loan is a set amount that you receive one time. A home equity line of credit allows you to take draws off the line up to the set amount either by check or debit card. They are typically for terms of 10 to 15 years and can be a fixed rate or variable rate. They offer programs with fixed amortization (meaning when you make your monthly payment, you pay interest and principal) or interest only. A fixed loan will normally have a higher interest rate that a variable rate. That is because a fixed rate never changes; there is less risk. When you go with a variable rate, it is possible that your rate will increase. Because of the higher risk, they offer a lower rate. If you have been watching the market for the past two years, the prime rate, which most variable rate home equity loans are tied to, has only changed a few times – for the better. There is no guarantee that this will continue or even stay the same.
If you think a home equity loan is right for you, please give us a call today for your personal consultation. Chances are, we have a line or loan that will fit you perfectly.
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