What is a Home Equity Loan?

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 or 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.

Cautions to Take with Home Equity Loans

1. Fees

There are a few things you need to remember when taking out a home equity loan. There are certain fees attached which vary from lender to lender. Examples include appraisal, credit report, title search, and notary fees. 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. To make sure you are not taking on too many fees, use this Home Equity Loan Calculator to figure out the amount you need to borrow so that you avoid paying more 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.
With home equity loan rates as low as 3.2% APR*, now is the perfect time to consider one with Education First. Use the money to consolidate debt, make big purchases, or finance home improvements.  
Want to know more about home equity loans? We're here to help! Give us a call at (409) 898-3770 or contact one of our knowledgeable mortgage team members

*APR = Annual Percentage Rate. Some restrictions apply. Terms and conditions are subject to change without notice. Offer subject to credit approval and based on individual creditworthiness. Promotion valid through December 31, 2021. Education First is an Equal Housing Lender.

**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.