What are the Advantages of a Home Equity Loan?
What Does the Word “Equity” Mean?
Equity is the difference between your home’s current appraised value and your mortgage balance. For example, if your home appraises for $200,000, and you owe $100,000, your equity is 50 percent.
You can also think of it this way: equity is a term used to refer to the market value of the interest in your home, or the difference between how much you owe on your mortgage and how much your home would be worth if you sold it today. The goal of a home equity loan is to help you cash out some of the portion of your home’s value that is yours free and clear, so you’re able to spend that money on remodeling and improvements or other miscellaneous expenses.
As home values continue to increase nationwide, a home equity loan could be an ideal way to access the cash value of your home to reach some of your financial goals.
Now let’s look at the eight primary benefits of a home equity loan.
Low Interest Rates
One of the biggest advantages of home equity loans is the low-interest rate. As the loan is secured by your house, it is considered not as risky by lenders. That means they are willing to offer lower interest rates.
This makes a home equity loan a viable option for homeowners who are wanting to borrow money at a lower interest rate than other types of loans, like personal loans or credit cards.
Because of these low-interest rates for the majority of home equity loans, borrowing against the equity in your home could be a great way to consolidate higher-interest debt, such as credit card debt.
Tax Deductible Interest
Home equity loans sometimes offer tax benefits. In many instances, the interest paid on a home equity loan is tax-deductible, and that can result in substantial savings for homeowners. But it is important to be aware that the tax laws surrounding home equity loans can be complex. That is why it is a good idea to consult with a tax professional before making any decisions on a home equity loan for this purpose.
Better Than Refinancing
Refinancing your house is sometimes a feasible option for paying off other debt while potentially getting a cash payout. But you’ll only want to opt for refinancing if you’re planning on staying in your home for at least the next 3+ years. You’ll want to consider the cost of the refinance and rate of return. Basically dividing the cost of the transaction by the monthly savings. If it takes 36 months or more to recoup those funds, a refinance may not be the best option. Ultimately this is how you determine if the savings on the monthly payment is worth the cost of the transaction.
A major advantage of home equity loans over refinancing is that home equity loans have a higher rate of cash-out options compared to refinancing, which may be more useful while remodeling or delving into another big home improvement project. Plus you are not resetting your loan term, which is beneficial if you do not want to start a 15 year or 30 year term over again.
This is another significant advantage of home equity loans. Homeowners are able to use the money they borrow for any purpose they choose, like home improvements, debt consolidation, or even for traveling. This flexibility can be particularly advantageous for people who have numerous financial goals they want to achieve.
Adds Value to Your Home
One of the best ways to have a home equity loan work to your advantage is by adding value to your home. This could involve improvements to your indoor or outdoor space, high ROI remodeling projects such as bath or kitchen upgrades, or adding square footage by finishing an attic or a basement.
Consider the benefits of short-term personal enjoyment and long-term resale value when strategizing your upcoming home improvement projects.
No Prepayment Penalties
As opposed to other types of loans, home equity loans typically do not come with prepayment penalties. That translates into homeowners being able to pay off their loans early without incurring any additional fees.
This can be a perfect choice for people who choose to pay off their debt quickly or who want the flexibility to make extra payments without penalties.
Improve Your Credit Score
When you take out a home equity loan and make on-time payments, this can help you improve your credit score. The loan is secured by your home, so lenders will be more likely to offer you a lower interest rate. This makes it easier to make payments on time.
Also, making on-time payments can help improve your credit score over time, and that can make available more financial opportunities for you in the future.
Improve Your Home’s Functionality
Are you planning to upgrade your kitchen or bathroom in the near future? Perhaps you’re wanting to remodel your recreation room to accommodate more guests. Whatever you’re considering, a home equity loan can help you implement any type of renovation project so your home works for you!
A Home Equity Loan Can Be an Ideal Way of Borrowing Money
As you can see, a home equity loan comes with many practical advantages for homeowners who want to access their home equity. From ultimate flexibility and low-interest rates to tax benefits and predictable monthly payments, home equity loans are an ideal option for people who want to borrow money at a lower cost and with greater built-in flexibility.
You want to be sure that you work with a reputable lender so you are able to make the best financial decisions for your specific situation.
Look to California Community Credit Union for Home Equity Loans
At California Community Credit Union, we offer two programs for home equity loans. Both are fixed-rate home equity loans. You’ll never have to worry about rising interest rates with these loans.
Also at CACCU, we provide a no-fee home equity loan special if the loan amount is under $50,000. Borrowing against the equity you have in your home couldn’t be easier.
We are here and ready to serve your needs for a home equity loan that is tailored to your personal needs.
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