A home equity loan, or second mortgage, allows for homeowners to leverage the equity in their home for cash. Home-equity loans allow owners to borrow up to $100,000, while still being able to deduct the interest off their home during tax time.
There are two types of home-equity loans: lines of credit and fixed-rate loans. Both types are available to homeowners and have terms that last from 5 to 15 years. Before considering either one of these loans, note that both loans require full repayment of monies borrowed before the home is sold.
This type of loan works like a credit card. It is a variable-rate loan, which means the interest rate of the loan can fluctuate depending on the underlying benchmark index, which can change periodically. The obvious advantage to a variable-rate loan is if the index decreases, so do the interest payments. Conversely if the underlying index increases, the interest payments will also increase.
With HELOC, homeowners are pre-approved to spend a certain amount of money, and can withdraw money at will using a designated credit card or checks. Borrowers must make monthly payments on the loan, however the interest rate is subject to change as the HELOC is a variable-rate loan. The HELOC has a specific term limit. When the end of the term is reached, the remaining balance of the loan must be repaid.
Fixed-rate loans are a popular choice among homeowners. These loans give borrowers one lump-sum of payment which is to be repaid over a specific period of time at a fixed interest rate. This means that the interest rate and payment stay the same over the life of the loan, unlike the HELOC.
Home-equity loans are a fast and easy way for homeowners to acquire cash. Even though borrowers will have to pay interest on the loans, interest rates are generally much less than those of traditional credit cards and other types of loans. Also, money paid on loan interest is tax deductible.
Home-equity loans can be valuable assets to the right borrower. Homeowners with a steady source of income, who are able to repay the loans in the allotted time, are good candidates for home-equity loans. Borrowers can take advantage of the low interest rates and tax deductibility of fixed-rate loans, while using the large sums of loan money to help pay for costly home projects or unexpected medical bills. While the HELOC can be used to pay for short-term, recurring costs.
Home-equity loans are not ideal for every homeowner. A common problem with this type of loan is its misuse by borrowers seeking an easy and quick solution to their debt problems, then falling deeper into debt. This cycle is called reloading. Reloading occurs when a borrower takes out a loan in order to pay off an existing debt to gain credit, but then makes more purchases. Oftentimes, borrowers who engage in this type of behavior are lured into home-equity loans that offer amounts higher than the worth of the home. These types of loans come with high interest rates, and the interest is not tax deductible.
Homeowners must also make wise financial decisions when taking out fixed-rate loans for home improvements. Taking out a loan to fix the kitchen or complete an addition to the home may raise the home’s value. However, taking out a loan to add a pool for example, may not be worth the financial risk, unless the addition of a pool is proven to raise home values in your area.
Navigating mortgage and loan rates is complicated! Why not let our team do the hard work for you? Equity Source Mortgage is a trusted mortgage broker in Minnesota. We believe that people deserve a home to call their own. At Equity Source Mortgage, our number one goal is to match you with the best loan for you. Contact us or call us at 763-657-2000 to begin exploring your home ownership journey – YOUR Dream Is Calling!