Home Equity Loans

When you have an expense coming up like college tuition, a major purchase or home improvements how will you pay for it? You might pay it in cash. However, if that’s not possible, you may want to consider a home equity loan.

How a Home Equity Loan Works

If you have a home worth $200,000 and your remaining mortgage balance is $120,000, you have $80,000 equity in your home (Home equity is the difference between what a home is worth and what you owe on it).

You can borrow against that equity.

Usually, you can borrow up to 80% of equity. So, in this case you’d be able to borrow $64,000 (80% of $80,000 is $64,000).

Your home would be collateral for the loan. This means if you didn’t pay back the loan per the agreed upon terms, the bank could take your house. While that’s a route no one wants to travel on, it is a possibility and worth considering prior to taking out a home equity loan.

Advantages of a Home Equity Loan

As suggested above, taking out a home equity loan may be the good way to handle a large one time only expenditure. You treat it almost like a project or an aberration that will not reoccur.

Following are some of the advantages of taking out a home equity loan:

• Fixed rate- Unlike a HELOC (Home Equity Line of Credit), the rate for a home equity loan remains the same throughout the life of the loan. This way you’ll always know your expenses and can budget appropriately.
• Tax Deductible- The interest on your loan may be tax deductible like the interest on your home loan is. Check with your tax advisor about this. If it’s true, it effectively lowers the cost of the loan
• Flexible Terms- Often repayment terms on a home equity loan can be negotiated to anywhere from 5 to 20 years in length.

So, compare a home equity loan with a HELOC and see which works best for you.

Steve Wyrostek -HomeLoans.org Expert A 20 year plus veteran of the insurance industry, Steve managed departments in the personal and commercial lines areas of major insurers. He’s familiar with how insurance—ranging from boat to workers compensation—works.