Is a Home Equity Loan Right for You?

One major asset that many homeowners tend to overlook when seeking a way out of a financial hardship is right under their noses… or perhaps more accurately, right over their heads: their home.  Your home is an investment and there’s no reason it can’t yield valuable returns for you. 

A home equity loan (HEL) is a loan that uses the equity built up in your home as collateral and it might be just what you need if your circumstances are right.  However, because home equity options are not created equal, here are a few tips to keep in mind before placing your property on the line:

• Home equity loans are intended for those who have a large, one time expense they need to cover quickly.  Because they are paid out in a single advance, if you have a large project in mind that will take an unspecified amount of time and money, you might consider other options such as a home equity line of credit which allows you continuous access to credit.  However, single expenses, such as paying off credit card debt, could be an effective use of a HEL.

• Speaking of credit card debt, a HEL may be a desirable option for those with less than perfect credit.  Lenders tend to see HELs as rather safe because they hold your home as collateral.  The fact that your property is being used as collateral for a HEL is frequently seen as a huge risk and possible downfall of this type of loan.  To ensure you aren’t forced to face this harsh penalty, be sure to know precisely how you are going to pay the loan back and make all your payments on time.

• HELs are generally offered with lower interest rates, and the interest paid on a HEL may be tax deductible.  Be sure to check with your CPA for complete details.

If a home equity loan sounds like it may be the right fit for you, remember to research potential lenders thoroughly.  Check local credit unions as well as larger banks and finance companies to gain better knowledge of available options before committing to a mortgage company.

Source: Informa Research Services