Knowing when to use a home equity loan

Did you know that you have a tax-deductible source of money right above your head? A recent national study of home owners found that more than 1/3 of all home owners did not know that a home equity loan and the interest on it is tax deductible. Any source of tax deductible money can be a great tool for financing purchases and investments.

A home equity loan is a loan that is basically based upon the amount of your home that you own. The difference between what your home is currently worth and how much you owe on the mortgage is the amount of equity in your home. While the value of your home fluctuate dramatically and thus greatly impact the amount of your equity, it is generally safe to assume that the amount of your mortgage paid off is how much equity you have.

A home equity loan can be a very valuable tool for several reasons. Perhaps the most compelling reason to use a home equity loan is the low interest rates on the loan as well as the tax deduction. Home equity loans are considered low risk since you are offering your home as security on the loan and thus the interest rates are very low. In fact home equity loans are normally have the lowest interest rates of all loans. You may also wish to consider using this type of loan when property values or on the rise in your neighborhood. As property values rise so does that amount of equity you have available. This increase in equity may allow you to finance other investment options.

Applying for a home equity loan is a little different from applying for a normal loan. The two main differences are the home inspection and the maximum amount available to you. Since the value of your home is the basis for you loan you must have the home inspected and appraised to evidence the value of it to your bank. Once the value of your home is determined the bank will be able to assess how much money they may lend you. Normally a bank will only lend 70 to 90% of the value of your home minus the amount that you currently owe. You can borrow up to 125% of the value of your home but these loans come with much higher interest rates, as they are not fully secured.

As is true with any loan your credit worthiness will be examined for a home equity loan. Even though you have equity in your home a bank may not be comfortable lending you money if your current credit to debt ratio is too high. The guidelines for your acceptance will vary from bank to bank but you can assume the basics. Your FICO score must be well above 640, all payments must be current, your job must be stable and you must be able to reasonable afford to repay all of your loans.

Because of the low interest rates home equity loans make perfect sense for several situations. One of the most common uses for a home equity loan is debt consolidation. Being able to reduce the amount of interest on all of your other loans can free up a lot of money each pay day as well as reducing the total amount that you owe which is great as long as you do not begin to get into more debt. Another common use is home improvements. Using a home equity loan for home improvements can be a really great idea as the improvements should increase the value of your home thus providing you with more equity in your home. Other common reasons for using a home equity loan include paying for children’s education costs and purchasing things such as a RV.

A home equity loan is a low interest loan that is secured by your home. Because of the security offered by your home the interest rates on a home equity loan are very low and tax deductible. This means that the proceeds from a home equity loan can be leveraged for other uses that may not be economically viable if you had to pay full interest rates.