Home equity loans are a great way to use the equity in your home to finance big ticket items such as home improvements, paying off high-interest debt, financing a car, paying for college tuition or buying a second home.
Two Types of Home Equity Loans
Home equity loans come in two basic forms: a home equity loan and a home equity line of credit. A home equity loan gives you a lump sum of money that you can use for a one-time big expense. A home equity line of credit (or HELOC) works like a credit card in that you receive a line of credit from which you can draw again and again as you need for a certain time period. You can access your line of credit via an electronic transfer ordered by phone, or by a set of checks, or home equity credit card given to you by the lender.
Benefits of a Home Equity Loan
Good Debt – Using your home equity loan for things like consolidating your high-interest debts, buying a car or boat, perhaps even a home theater system, is a smarter way to finance these things rather than putting the expense on your credit cards. For one thing, you’re getting a lower interest rate than you would with your credit cards. It’s a way of re-structuring your balance sheet in a more positive way.
Tax Deductibility – Perhaps the most important benefit of a home equity loan is the tax advantages. With a home equity loan, the interest is usually tax-deductible*, saving you money over the long-term. Interest on credit cards is not tax-deductible.
Flexibility – There is also flexibility that can be built into home equity loans that you wouldn’t get from say, an auto loan. Some home equity programs have interest-only options. With an interest-only loan, you can pay only the interest for a predetermined amount of time and pay as much principal as you want, even none. You can’t do that with an auto loan.
And now, some lenders are even offering lines of credit up to $500,000. This is a great option to have when buying your dream vacation home.
Safety Net – Another use for a home equity loan that is popular among retirees is using it as an alternative source of income.
Easy to Obtain – In recent times, home equity loans have become even easier to procure. With the increased use of the Internet by service-oriented companies, some lenders are now offering online applications. With an online process, it’s less complicated to get a home equity loan than it is for a standard first lien mortgage. For one thing, there’s less paperwork. You can find out if you’re approved right away and you can close in a very short amount of time; 7-10 days with some lenders. The experience can be no more complicated than getting a credit card.
In summary, a home equity loan can be thought of not as a mortgage or a loan, but as a smarter way of using the assets you have (your home’s equity) to finance big-ticket items. Think of it as a low-interest alternative to high-interest credit cards that comes with greater flexibility and tax advantages.
*Please consult your tax advisor.
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