What is a Home Equity loan?
A home equity loan is a loan secured by your home’s equity, which allows you to borrow a fixed amount that you receive in one lump sum. The amount you will qualify for is calculated based on your home’s loan-to-value ratio, payment term, your income and your credit history. Most home equity loans have a fixed interest rate, a fixed term and a fixed monthly payment.
Benefits of a Home Equity Loan:
1. Better flexibility and lower interest rates
Need to repair your home? Pay for college? Pay off debt? A home equity loan is flexible and allows you to use the loan beyond home improvement projects. Plus, you can borrow at a lower interest rate than unsecured loans. This is a huge benefit because it still allows you to borrow money, but guarantees you will be paying less interest as you would with a credit card of personal loan.
2. Fixed rates
Not only does a home equity loan offer lower interest rates, it also offers fixed interest rates. This means you know exactly how much your monthly payment will be for the entire life of the loan. Instead of worrying about factors that might affect your monthly payment, you can rest assured your payment will remain fixed throughout the life of the loan.
3. Some home equity loans are tax deductible*
Are you looking to use a home equity loan to finance your home improvement project? This benefit is for you. Your interest on your home equity loan is tax deductible if you use the loan to buy, build, or substantially improve your home, according to the IRS. When it comes to deducting interest for home renovation loans, homeowners will need to be on guard, though. The IRS has only defined a “substantial” improvement to a home as one that adds value, prolongs its useful life or adapts a home to new use. This means homeowners who put on an addition, overhaul key structural elements or make the home more livable or accessible are likely to qualify. But those who make cosmetic upgrades may not. In a publication issued at the end of 2018, the IRS wrote that “repairs that maintain your home in good condition, such as repainting your home, aren’t substantial improvements.”
Cautions to take with home equity loans:
There are a few things you need to remember when taking out a home loan. A home equity loan also has fees associated with it, that vary from lender to lender. Examples include appraisal, credit report, title search, and notary fees. You can read more about each one these fees here. To make sure you are not taking on too many fees, use this Home Equity Loan Calculator to calculate the amount you need to borrow, so that you avoid paying more in fees than you want.
2. Making payments on time
While a home equity loan is a great solution for many people to eliminate high interest debt or pay for other large expenses, it is important to understand that these loans use your house as collateral, and if you are suddenly unable to make the mortgage and home equity payment, you risk losing your home. So be sure that you are not taking on a larger payment than you can afford and maintain.
At a time where home equity loan rates are at historic lows, now is the perfect time to consider one if you are looking to make home improvements or free up some extra money. Just be sure to calculate all the fees in advance, and consider whether you can really afford the monthly payments of your home equity loan, in addition to your regular mortgage payment and home equity loan.
Want to know more about Home Equity loans? Give us a call at (409) 898-3770 or read about our Home Equity Loan details here.
*Education First does not provide tax, legal, or account advice. This article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.