Banks and other lenders often eagerly offer a home equity line of credit to homeowners in good financial standing. The terms may be tempting: A low interest rate applied to the property’s equity or current paid value accessible with a debit card or bank transfer as needed. With a home value that exceeds what is currently owed on the balance of the mortgage loan, it makes sense to use those funds for immediate needs, like remodeling the kitchen or building a patio.
But home equity loans are not reserved just for home remodeling or repairs. Available credit on a property’s value can be used for anything that a regular credit card can buy. Consequently, it is easy to spend that money when it becomes available through a home equity line of credit. This is done by applying for a loan, with the property used as collateral against the loan. So, if something happens to prevent you from repaying the loan, your home can be taken by the creditor, and you will lose it. In effect, a home equity loan is a second mortgage on your property.
Many homeowners don’t want to risk losing their property by taking out a second mortgage based on their home’s equity. Keeping up with the regular mortgage can be hard enough, especially if you become unemployed in losing your job or are able to work only part-time. Having two mortgages to repay increases stress and the financial burden of meeting payment due-dates. Trying to sell the home to get out from under the mortgage payment becomes extra difficult, as the second mortgage will have to be paid first by the homeowner or from the proceeds of the property’s sale.
However, under the right circumstances, a home equity loan can be very helpful. First, it allows you to make use of the equity accrued on your home rather than letting it sit idle. If your home is worth $150,000 and you still owe $70,000, there is a substantial amount of available credit in your home’s equity. Keep in mind that the lender will advance a percentage of the current equity, on average about 85 percent, balanced against your income and any other outstanding debts.
Second, interest paid on a home equity loan can be claimed as a deduction on your tax return. Certain conditions may apply, so you will need to discuss this with your accountant or carefully read the tax rules if you prepare your own returns.
Third, home equity loans are often approved at lower interest rates than standard credit cards or credit accounts. A line of credit against your home’s equity could be the cheapest way to finance a college education or a dream vacation. The main thing is to be sure you can afford the monthly payments with low risk of default.
A home equity loan is a convenient source of credit that may be readily available at your fingertips, depending on your home’s equity and your other financial obligations. If you are thinking about borrowing money for a substantial but necessary or long-planned purchase, contact a lender who is offering great terms on a home equity loan. Then compare the advantages and terms with other credit offers currently available.