Home-equity loans are also known as second mortgages. These allow homeowners to borrow money through the process of leveraging equity in their homes. Home equity loans have been around since approximately 1996, since the tax changes that year of obliterated the deductions for interest on consumer purchases. Under the guise of a home equity loan, homeowners are eligible to borrow up to $100,000 and adopt all of the interest when filing their taxes for that year.
Fixed Rate Home-Equity Loans
Fixed rate home-equity loans offer a lump sum payment to the borrower. The borrower then has to pay this back over a specified period of time at a specified interest rate. One of the benefits of a fixed rate home-equity loan is that the rate and payment status same throughout the duration of the loan.
Home-Equity Lines of Credit
Unlike a fixed rate home-equity loan, a home equity line of credit (also known as a HELOC) has a variable loan rate. Perhaps the best way to think about this form of loan is to compare it with a credit card. A borrower will be pre-approved for a certain limit, from which they can withdraw using a credit card or check system. The payments also vary based on the money taken out and the interest rate at that time. One similarity between and HELOC and a fixed rate loan is that set terms are in place for both. When the end of that term occurs, the loan amount must be repaid completely.
Home-equity lines of credit offer flexibility to borrowers in the short term
Home Equity Loans Consumer Benefits
Home-equity loans provide an immediate and simple source of cash. Although the interest rate on a home equity loan is higher than a first mortgage, it is still lower than credit cards or other forms of loans. One popular reason to get a home-equity loan is to use the cash in the short term to pay off credit card debt. Since interest on a home equity loan is tax deductible, this is a very popular solution for homeowners in need of money. This is like consolidating the home equity loan with debt and only having to make one payment with a lower interest rate.
Responsible borrowers stand to reap many benefits from a home equity loan. A stable source of income and confidence in your ability to repay the loan can make the low interest rate and tax deductibility very appealing. If you’re in the position of needing to purchase something large rather quickly, such as a major home repair, a fixed rate home equity loan is a viable solution. Some people even use an HELOC loan to help assist with the cost of college tuition, since it’s an appealing option for short-term needs.
For a responsible borrower, home-equity loans offer efficient and easy solutions
Downsides of Home-Equity Loans
These loans are recommended for responsible borrowers with a steady source of income. This is not an ideal solution for anyone still trapped in the spending, borrowing, and then spending again cycle. Seeking out a home-equity loan should be done with careful thought and consideration backed up by research.
Home-equity loans are not a solution for everybody