The Advantage of Home Equity Loan Rates: Affordable, Tax-Deductible
A home equity loan can enable you to use some of that capital tied up in your house to take care of immediate needs without having to sell your property.
Those needs may include home improvements, medical bills or almost any other financial issue. An increasingly popular strategy is to use a home equity loan to consolidate debts of all kinds, paying them off at a lower rate and saving thousands.
Whatever the purpose, a regular or bad credit home equity loan possesses unique advantages that allow you to receive the money you need at a lowest cost.
Some of the interest rate advantages of a home equity loan are:
Low rates
Because a home equity loan is secured by your house, you can enjoy a favorable interest rate - usually below the rate for a regular personal loan, and well below credit card rates. These home equity loan rates are generally higher than that of a first mortgage, but not always.
Moreover, a home equity loan often allows you to borrow up to 125 percent of the appraised value of your home, which means you can qualify for a sizeable loan at that favorable rate.
Interest deductibility
Because the loan is secured by your home, you also get a second bonus. The interest on a home equity loan is usually tax-deductible, up to a maximum of $100,000, depending on how much equity you have in your house. Consult a tax advisor to determine how much applies to your particular situation.
Flexibility
Home equity loans come in different forms that allow you to take advantage of interest rate changes. A fixed home equity loan, also called a term loan, has a set interest rate. Therefore, it’s a good choice if mortgages rates are rising because you can lock in the rate.
It’s also a good choice if you have a specific purpose for the loan, such as a home renovation, that requires a set amount of money.
If your need for cash will be ongoing or occasional, you can choose a home equity line of credit. This lets you borrow as much as you need when you need it (up to a set credit limit), using a credit card or check. The money you borrow carries the current interest rate, so you can take advantage of falling rates. However, it also exposes you to higher payments if rates are rising.
The line of credit has a cap, limiting how much the rate can increase, so you have some protection. And, of course, you can always slow your borrowing or repay what you’ve borrowed before rates get too high.
A home equity loan is a good way of getting needed funds at an affordable rate. However, as with all types of debt, it’s wise to avoid borrowing more than you can repay. Remember that because the loan is secured by your house, the home loan lender could foreclose on your home if you don’t repay the cash.
Keep it mind that the interest rates on home equity loans generally follow the federal funds rate; it pays to check your newspaper’s financial pages for moves in that key interest rate. This can help you decide which option is best.
SOURCE: Lending Tree