Home
equity loans and interest rates
If much of your wealth is tied up in
your house, a home equity loan can enable you to use some of
that capital to take care of your immediate needs, without
having to sell your home.
Those needs may include home improvements or medical bills.
An increasingly popular strategy is to use a home equity loan to
consolidate a number of high-interest-rate debts so they can be
paid off at a lower rate. Whatever the purpose, a home equity
loan has some unique advantages that allow you to get the money
you need at the lowest cost.
Some of the interest rate advantages of a home equity loan
are:
Low rates: Since a
home equity loan is secured by your house, you can get a
favorable interest rate -- usually below the rate for a regular
personal loan, and well below credit card rates. The home equity
rate is generally higher than that of a first mortgage, but if
rates are falling, it can be lower. And a home equity loan often
allows you to borrow up to 125 percent of the appraised value of
your home, less your mortgage balance, 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. That makes it
a good choice if rates are rising since 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. But, as with all types of debt, it’s wise
to avoid borrowing more than you can repay. Remember that since
the loan is secured by your house, the lender could foreclose on
your home if you don’t repay the money. If you’re not
comfortable with that risk, a conventional loan might be a
better choice.
Since 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. That can help you decide which option to choose.
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