A home equity loan allows you as a homeowner to get a loan by using the equity in your home as your collateral. The equity here consists of whatever funds you have invested in your property in order to own it or improve it. Since it is a debt against your own property, which you are in actual possession of, a home equity loan is a secured debt. The property can be required to be sold if you are unable to pay the money back that you have borrowed.
Home-equity loans typically have fixed rates and give you five to 15 years to repay. Home-equity lines of credit usually have variable rates and a 10-year period during which you make only interest payments, followed by a 10- or 15-year period during which you must pay off the debt.
Why Should I Consider a Home Equity Loan to Pay for Repairs?
Repairs and maintenance are part of the routine costs of owning a home. Such expenses ideally should be paid out of your current income. Some years you’ll spend less, but other years you’ll spend more, and it can be handy to have some cash saved up for bigger repairs. If you don’t have the cash but need to make the repairs to preserve the value or safety of your home, then a home-equity loan or line of credit can be a good alternative. The interest rates on home-equity borrowing tend to be low, and your interest payments may be tax-deductible.
When you’re using home equity for repairs, though, you should try to pay off the loan as quickly as possible. Unlike home improvements, repairs don’t add much value to your home, so it doesn’t make sense to stretch out the repayment.
Tax benefits of home equity loans
A home equity loan is also beneficial because the home equity loan rate charged is usually tax deductible, as the loan is used for its primary functions. You can check on various home equity interest rates with a home equity loan calculator and decide what the best rate is for you. This is not the case with other forms of consumer credit, like credit cards and auto loans.
Do Your Homework
Contact several lenders–and be very careful about dealing with a lender who just appears at your door, calls you, or sends you mail. Ask friends and family for recommendations of lenders. Talk with banks, savings and loans, credit unions, and other lenders. If you choose to use a mortgage broker, remember they arrange loans but most do not lend directly. Compare their offers with those of other direct lenders.
Be wary of home repair contractors that offer to arrange financing. You should still talk with other lenders to make sure you get the best deal. You may want to have the loan proceeds sent directly to you, not the contractor.
Comparing loan plans can help you get a better deal. Whether you begin your shopping by reading ads in your local newspapers, searching on the Internet, or looking in the phone book, ask lenders to explain the best loan plans they have for you. Beware of loan terms and conditions that may mean higher costs for you. Negotiate with more than one lender; don’t be afraid to make lenders and brokers compete for your business by letting them know you are shopping for the best deal. Ask each lender to lower the points, fees, or interest rate. And ask each to meet–or beat–the terms of the other lenders.
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