A home equity loan, also known as a second mortgage, is exactly what it sounds like. With this, you’re able to borrow money by leveraging the equity in your home.
Before you learn more about the benefits of a home equity loan, it’s critical to first understand how to calculate your equity.
This is nothing more than the difference between the appraised value of your property – which your bank can provide – and your current mortgage balance.
For example, if your home appraises at $500,000 and you owe $300,000 on your mortgage, your available equity is $200,000. Your lender will let you know how much of this equity you can borrow.
Here are the three primary benefits of a home equity loan:
- Fixed interested rate: Unlike other types of loans and many credit cards, a home equity loan has a fixed interest rate. Once you know how much you need to borrow, your lender will present you with a monthly payment that never changes. This allows you to more easily budget for the expense.
- Tax deductible: This isn’t the only reason to choose a home equity loan, but it definitely helps come tax season. Not everyone qualifies – so check with your tax professional – but you may be able to deduct the interest you pay on your home equity loan.
- Lump sum payment: If you require a lump sum payment, a home equity loan won’t let you down. Once you agree on an amount with the bank, the funds are provided to you via a direct wire or check. You’re then responsible for paying back the entire amount, with interest, over the agreed upon term of the loan.
Note: If you no longer own your home, you can’t continue to use it as collateral for a home equity loan. So, if you sell your property, you’re required to pay back the loan in full.
How to Use a Home Equity Loan
Don’t apply for a home equity loan just because you can. Only do so when you have a clear idea of how you’ll use the money.
Some of the best ways to use a home equity loan include:
- Home improvement project, such as a kitchen renovation or addition
- Educational expenses, such as your child’s college tuition
- Debt consolidation
- Paying for a child’s wedding
Generally speaking, if you have a major expense in your life (or you see one coming at you), a home equity loan is one of the best ways to deal with it.
Since a home equity loan is secured by your property, it’s easier to qualify for than other types of loans.
If you’re intrigued by the benefits above, contact several lenders to learn more about their home equity loan programs.
Once you better understand your situation and options, you can compare the pros and cons of a home equity loan to decide if it makes sense for you right now.