Checks & Balances
These days it seems as if we can borrow money from just about anywhere, but if you’re looking for a large amount of money to tackle that home improvement you’ve been dreaming of, perhaps the best way to borrow is through a home equity loan. Before you do however, we want to make sure you understand exactly what a home equity loan is and how it differs from other loans.
According to bankrate.com, collateral is property that you pledge as a guarantee that you will repay a debt. It you don’t repay the debt, your lender can then take your collateral and sell it to get its money back. The term equity refers to the current market value of your home minus the outstanding mortgage balance.
A home equity loan is a one- time lump sum with a fixed interest rate in which your home serves as collateral. These types of loans are typically used to pay for home improvements, to consolidate debt, to pay for tuition expenses, medical expenses and other big ticket items. In most cases, home equity loans are tax deductible, borrowers can deduct the interest on loans up to $100,000 on their taxes, according to the Federal Trade Commission. Unlike unsecured personal loans however, a person’s home is used as collateral when taking out a home equity loan.
As stated earlier, a home equity loan may be used for a variety of reasons, the most common being debt consolidation and paying for home improvements. Making improvements to your home can help increase your home’s value and can even help save you money in the long run by creating a more energy efficient place to live.
A home equity is oftentimes used to consolidate debt and pay off high interest credit cards. Credit card interest rates can be at least 10 percentage points higher than home equity loan rates, according to bankrate’s website. Loans secured by real estate are generally considered safer by lenders, resulting in a lower interest rate. Consolidating with a home equity loan will secure a fixed interest rate for the life of the loan.
Home equity’s may be used to finance a car or other major expense. While you’ll benefit from a lower interest rate however, keep in mind that under Chapter 13 Bankruptcy, unless you have an acceptable plan to catch up on your debt, bankruptcy usually does not allow you to keep property when your creditor has an unpaid mortgage or security lien on it, according to the Federal Trade Commission.
Payments on a home equity loan can differ from typical loan payments. Many times lenders use what is referred to as a balloon mortgage, a short-term loan that offers lower monthly payments and a lower interest rate than a traditional fixed-rate mortgage because it’s not fully paid off at maturity. At the end of the loan term, your monthly payment “balloons” to include payment of the outstanding principle. In other words, the borrower pays down the interest during the course of the loan and is then required to pay the entire principle in one large lump sum at the end of the loan term. At El Paso Employees FCU however, our home equity loan payments are fully amortizing, which means that the lender will pay both the principle and interest until the loan is paid off.
Home equity loans can be a useful tool when consolidating debt or improving the value of your home, and we want to make certain that you are fully aware of all the terms and conditions before taking the next step. Use caution when taking out a home equity loan for any type of expense and always explore your options. If you’re considering using a home equity loan to pay for your child’s tuition expenses, make certain that you have looked into all financial aid and scholarship options first.
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