One of the most popular things that people like to do when they own a home is to get a home equity loan. This type of secured loan allows you to borrow cash against the value of your property. The loan gives you access to large amounts of cash, and they can be easier to qualify for than other loans because they are secured by the home.
If your home is worth more than what is owed on it, getting a home equity loan can give you funds for anything you want. You do not have to use the money for home improvements, although that is the most popular option. A home equity loan is a second lien on your home, and it does come with some risks. So, you should carefully consider the pro’s and con’s of getting a home equity loan before you close on the deal.
What Is Good About a Home Equity Loan?
In most instances, home equity loans are a good deal for borrowers for the following reasons:
Home Equity Rates Are Still Low
Home equity loans nearly always have a much lower rate than what you can get on an unsecured credit card or personal loan. One of the places you may want to consider getting a home equity loan is from a credit union.
Credit unions may offer slightly lower rates than other lenders, such as banks and mortgage lenders. Credit unions are nonprofit organizations, so there is less of a profit motive in the lending practices. Credit unions can be a reliable source to get a low rate home equity loan. If you have not talked to your local credit union about a home equity loan, you should definitely put it on your list. It is an innovative idea to talk to at least three lenders, with a credit union being one of them.
Getting approved for a home equity loan is often easier than getting many other loans. It also is typically an easier process than getting your first mortgage as long as you have paid your mortgage on time. But getting a home equity loan does require a lot of documents like any home loan.
You should be able to borrow a large amount of money in some cases if you have substantial equity. For major expenses such as higher education, home improvements or investing in real estate, tapping your home equity might be the best source of low interest funds.
Possible Tax Benefits with Home Equity Financing
In the past, you could deduct the interest you pay on the equity loan. This was especially true if you are using the cash for major improvements to the property.
One of the reasons these loans are relatively easy to get, if you have enough equity, is they are a safe bet for lenders. It is your primary residence and people will do what they must to pay the mortgage. When the loan is secured by your home, it is less of a risk for the bank.
There have been a lot of changes to the laws in regards to deducting interest. As of 2018, homeowners are unable to deduct the interest from their home equity loans as they did in the past.
How Home Equity Works with Loan Programs
When you borrow cash from your property, you can do one of two things:
- Lump sum: Take a big lump sum of equity all at once and pay the loan over time with fixed interest payments. The rate is usually fixed when you take out the loan and is set for the entire term of 10 or 20 years.
- Line of credit: Also referred to as a HELOC, this is a line of credit based upon your home’s equity. You get approved up to a maximum credit line and take it out as you need it. The interest rate on the loan is fixed for a short period, sometimes six months or a year or two. But then it can go up based upon market conditions. Interest only payments are the norm during the 10-year draw period, but interest and principal must be paid back after that. In some cases, a HELOC can be obtained with no lending fees, similar to the no cost refinance. These loans are higher risk for the borrower because payments can increase.
Getting a Loan Using Your Home’s Equity
As noted earlier, apply with a few lenders, including a credit union, as they may be able to get you a lower rate, if your credit is good enough. Interest rates can vary from lender to lender, so be sure to check around. You also must pay closing costs to get the loan completed and you have to pay for an appraisal; this ensure the bank or credit union that the home is worth enough for it to be borrowed on.
The takeaway on home equity loan is it can be a good financial tool if you are using the money appropriately. Making home improvements that add value to the property are your best bet. It never hurts to check with your credit union to see if you can get a lower rate, but don’t just assume they will get you the loan you need. I many instances, the credit union offers are for HELOCs or equity loan programs targeting borrowers with credit scores above 760.