A home is most commonlypeople’s most prized possession. It can be more than just a place ofsolitude, it can be a way of achieving a great low interest loan. Mostpeople understand that they can use their house as collateral to obtain amortgage, but there are other types of loans that allow you to take the equity,or the value of your house minus any loans, out and use that for whatever youwish. This type of loan is called a Home Equity loan. There are twomain types; A home equity loan, and a home equity line of credit.
You can deduct theinterest paid on both types from your taxes, making sure to speak with a taxadvisor so that all rules are being followed. Home equites are usuallyrestricted to a certain loan to value percentage due to them generally beingused as a second lien on your home. This means that the bank will onlyloan you a certain amount based on the value of your home. Most bankscurrently are around 80%. That means that if you own a home that isvalued around $150,000, the bank would only loan you up to $120,000 in a homeequity loan. That amount includes any mortgages that may be on yourproperty, so you would have to subtract your mortgage balance from $120,000. Most banks may charge an annual fee for having the loan, but sometimesthat can be waived depending on the balances and account that you keep. Here are the few differences between the two loans.
Home Equity Loan– This is a fixed rate loan that can range anywhere from 1-30 years longdepending on the bank. The rates will be higher than current mortgagerates due to lower closing costs, if any. Currently rates are as low as5.5%
Home Equity Line of Credit – The line of credit has a variable rate that is based on theprime rate. The prime rate is controlled by the fed, and currently is at3.25%. The rate on the heloc (home equity line of credit) is a percentageadded on the prime rate. Right now rates are as low as 4% for heloc’s. Heloc’s are similar to credit cards. You apply for an amount, andare given a line of credit with your home as collateral. So if you borrow$100,000 and only use $5,000, you are only required to pay interest on that$5,000. Some people never even use their heloc, they simply get it foremergencies. The loan term can be anywhere from 5-30 years, depending onthe bank. However the draw period, the time that you can borrow from theheloc, is generally around 10 years.
Either type of loan is agreat way to purchase vehicles, do home repairs, payoff credit cards, or justsimply have for emergencies. Just remember only to use the loan fornecessary debts and not to go overboard. The loan has a lien on your mostprized possession. To learn how to check your credit score to make sureyou will qualify for a home equity, read the post My credit score is what?.