Committing to a home equity loan may be just what you need to meet a large, unexpected expense or to make that needed home improvement. Home equity loans make use of the equity you have built up in your home as collateral. When used wisely, they can be far wiser choices than personal loans or reverse mortgages. It may not be for the rest of your life, but it is a big decision that will affect your financial future, for better or worse.
In today’s changing real estate and financial markets due to the economic upswing, here are the top facts that you should know before committing to a home equity loan.
Consider the Loan versus the Line of Credit
Financial institutions generally give you two options for borrowing against your home’s equity. The first is the home equity loan, which gives you a lump sum that must be repaid using a fixed interest rate. The line of credit gives you a certain amount that you can borrow against whenever you need money. Rates are generally variable for the line of credit, and borrowers usually pay back only interest during the initial draw period.
Rates Are Going Up
As financial markets swing back up, you will begin to see home equity loan rates head up as well. This year should see an interest rate increase of up to three quarters of a percent for home equity loans.
Use It for Tax Relief
Make sure you tell your accountant about your home equity loan as you may be able to use it to write off some of your cash this coming year. Individuals and couples filing jointly can claim up to $100,000 of interest related to home equity debt each year on income taxes.
Banks versus Credit Unions
Your best bet for finding a good home equity loan interest rate is to shop around. Do not be afraid to head to several banks or credit unions around town. You may find the best rates at a local credit union because credit unions are usually non-profit organizations that have fewer fees than banks have. However, if you are dealing with bad credit, a bank may be more interested in taking you on but may give you a higher rate.
Use It Wisely
A home equity loan should not be blown off lightly. Use it to make smart investments in your home, such as home improvements that will pay off when you sell, including bathroom or kitchen remodels. Other good uses could include debt consolidation if you are disciplined to make full payment each month as well as paying for your child’s college education as long as you are fully covered financially for retirement.
Of course, if you make poor use of your home equity loan, using it to overspend, you may find that you end up in a worse financial state than when you started. However, home equity loans are coming back into vogue now that many families’ finances are coming back up and individuals are regaining equity in their homes. Be sure to shop around for the best rates by checking out local banks and credit unions as well as online financial institutions.
This article was written by Dixie Somers, a freelance writer who loves to write for real estate, women’s interests, and home décor. She lives in Arizona with her husband and three beautiful daughters.