Home Equity Loans: A Powerful Financial Tool
April 10, 2013
The 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. While there are some risks with this strategy (as with any borrowing), home equity loans usually offer the attractions of lower rates, convenience and often tax benefits.
How does a home equity loan work?
Most institutions view home equity as good collateral and offer qualified applicants a home equity loan to lend money against that equity. Funding may allow you to access funds over time or be issued in a check. Talk to a Home Federal Banker about your home equity options.
The loan amount can depend on the amount of equity in your home and other credit characteristics. A general lending rule of thumb is that the total debt against your home (including the first mortgage and any other loans where your home is pledged as collateral) is less than 80% of the current value of your home.
The interest rate charged will usually be variable and will be pegged to some published index, like the prime rate.
Attractions of Home Equity Loans
Convenience - Some financial institutions make it easy to apply and their approval processes are fast. The process is often simpler than if you were applying for a new mortgage. Some home equity loans act 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. Using the proceeds of a home equity loan to pay off credit card debt will usually save you money.
Tax benefits - For individuals that itemize their tax deductions, the interest paid on home equity loans can help save some income taxes. While there are some limits on this type of interest deduction, it may save you some tax. Consult with your tax advisor for more details.
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 college tuition or even to buy a car. Compare the rates on an auto loan and a home equity loan the next time you are financing a car.
Assess the risks
As with any financing, borrowing against the equity in your home should be assessed carefully. These types of loans are like other loans - you pay interest and they must be paid off in the time frame agreed upon. Most people use home equity loans for purposes they can afford and avoid making risky investments with the proceeds.
For more information about home equity loans, contact a Home Federal Banker today at 1.800.244.2149.
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