The equity in your home can be a powerful tool when it comes to managing your finances. Your equity, (the value of your home minus your existing mortgage), can serve as collateral for additional borrowing. While there are some risks with this strategy (as with any borrowing), home equity loans usually offer the attractions of lower rates, convenience and potential tax benefits.
How does a home equity loan work?
Financial institutions view home equity as good collateral and are often willing to lend you money against that equity. Lenders may issue you a check or give you a checkbook to enable you to access a line of credit when you need it. There are usually documents to sign and an approval process that is not too difficult. There may be a commitment fee as well.
The amount you can borrow depends on the amount of equity in your home and your credit worthiness. A general rule of thumb is you can borrow up to an amount so the total outstanding debt on your home (including the first mortgage and any other loans where your home is pledged as collateral) is less than 80% of its current appraised value.
The interest rate charged can be fixed or variable, with the variable rate tied to a published index, like the prime rate. There are also financial institutions that offer low introductory rates for an initial period, such as six months. After the introductory term, the rate increases to the current published rate. Usually, you repay the loan in regular monthly installments and with minimum repayments required. With some home equity loans, the minimum payments may only be the interest on the loan and you may be required to repay the loan by a certain date. Refer to the loan disclosure for details.
Benefits of Home Equity Loans
Borrowing against the equity in your home should be considered carefully. Even though there are benefits, these types of loans are like other loans - you pay interest and they must be paid off. Most people use home equity loans for "conservative" purposes and avoid making risky investments or extravagant spending with the proceeds.
Read and understand all the details before signing. Loan documents can be confusing and the easy process of getting this type of loan can mask the costs and risks.
Do you want to make a major purchase, complete a home renovation project, consolidate debt, or cover unexpected expenses? You may be able to use the equity right in your home! Home equity loans and home equity lines of credit (HELOC) feature low monthly payments, potential tax benefits, flexible payment options and high credit lines. At Provident Bank, we can help you find what works for you. Visit a local branch or our website for more information.