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A Home Equity Loan: Is It Right For You?

By
Mortgage and Lending NMLS #209419

Home equity loans can be great financial tools that not only facilitate home improvements but also contribute toward building wealth. Proper use is essential, however. Just as a knife is helpful when cutting open a box, it can also hurt you if it's used carelessly.

Through a combination of proper planning, an evaluation of current markets, and the guidance of a mortgage professional, you should be able to determine the best use of the options available to you.

Why Obtain a Home Equity Loan?

There are a number of very good reasons to take out a home equity loan. A few examples are: home improvement; debt consolidation to reduce overall interest costs; and the creation of an available fund, so that you won't have to deplete other financial assets in the event you're faced with an emergency.

Home equity loans can also be utilized to eliminate Private Mortgage Insurance, or PMI, when putting less than 20% down on a home purchase. In this case, the second mortgage is often referred to as a "piggyback" loan. This type of loan can allow a home buyer to put as little as no money down and still avoid paying PMI.

Just as there are good reasons to utilize a home equity loan, there are also some poor reasons. The most important of these is consumption. Home equity loans are not a good vehicle to fund your lifestyle choices. For example, you may not want to write a check from your home equity account to buy a jet ski.

What About Rates?

The interest rates you will pay for a home equity loan vary and typically carry higher rates than those paid on a first mortgage. Interest rates can vary dramatically depending on the amount being borrowed, the amount of equity remaining in your home after the loan is taken out, and the credit score of the borrower(s). Rates can also vary by property type: single family residence, condominium, or multiple units (duplex, tri-plex or quad-plex); and occupancy: owner-occupied versus investment property.

Rates can run anywhere from approximately 1.00% to nearly 7.00% higher as compared to a first mortgage. Lower rates are associated with higher loan amounts, higher credit scores and more equity remaining available, or combined loan(s) to the appraised value of your home, after the loan is closed.


Home Equity Loan

Home Equity Loans are similar to a traditional fixed rate first mortgage. Money is borrowed for a specified term, and regular monthly payments are required for the term of the loan.

The term of a Home Equity Loan can vary by institution, and it can be for as short as five years or as long as twenty years. In some cases, a lender may offer a fifteen year loan with payments amortized over a thirty year period, with a balloon payment due at the end of the loan.

The interest rates offered for Home Equity Loans are generally fixed for the term of the loan and vary according the factors mentioned previously.

Time for Evaluation

Home equity loans are tremendous vehicles for helping people achieve home ownership and offering ways to help property owners maximize their tax deductions. This is the case because the interest is normally tax deductible for these loans, as compared to consumer loans.

When considering any of these options, the best way to begin is by talking to our professionals and your tax advisor. If you have any questions regarding how a home equity loan can benefit you, call our office today!

We can be reached at (832) 519-0695 or by email at henry@GoToEquityMortgage.com

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