The Do’s and Don’ts of Using Home Equity

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If you are thinking about making home improvements or funding your child’s education, tapping into the equity in your home can be a good way to access cash quickly. Often a homeowner’s most valuable asset, home equity is the difference between what your house could sell for and what you owe on the mortgage. If you need to borrow money against this asset, financial institutions may lend you money using your home as collateral.

Borrowers tend to use their home equity to cover large expenses such as home repairs, home improvements, weddings, college tuition, purchasing a second home or consolidating high-interest loans. For those scenarios, borrowing equity from your home may be a good choice.

Options

There are two ways you can borrow against your property:

  • A home equity loan lets you borrow a lump sum and pay it back over a fixed term at a fixed interest rate (like a mortgage or car loan).
  • A home equity line of credit (HELOC) works like a revolving line of credit, so you’re preapproved for a certain amount of money. You can borrow the funds (up to your limit), then repay and borrow again as often as you like during the loan term. It has an adjustable rate that changes based on the rate it is tied to, such as the prime rate or London Interbank Offered Rate (LIBOR).
    A home equity loan makes sense if you need a large amount all at once for a specific project. A HELOC might make more sense if you need to borrow smaller amounts over a longer period, such as a term of five
    or 10 years, followed by a repayment period of up to 20 years.

Benefits

Homeowners who want to budget for exact monthly payments may prefer a home equity loan. Because your home acts as collateral for the loan, home equity loans usually have lower interest rates than credit cards and other types of unsecured debt. Also, limited tax deductions may be available for home equity loans, such as if you use the loan to complete capital improvements. Always consult a tax professional to determine your exact tax situation.

One benefit of using a HELOC is that the interest compounds only on the amount you draw, not the total equity available in your credit line. You may also have flexibility of paying interest-only payments during the draw period.

Drawbacks

For those who don’t want to tie up their equity for a five- to 30-year term or who want the option to take out money multiple times, home equity loans may
not be a good fit. This is where a HELOC may make more sense.

Lenders

The best home equity lenders have a transparent and efficient application process and can clearly explain the options available to borrowers. You can also check with the Better Business Bureau for more information about lenders you are considering. When comparing home equity lenders, be sure to review:

  • Eligibility requirements
  • Loan limits
  • Interest rates
  • Fees
  • Customer satisfaction ratings

To get the best loan for your needs, consider how much money you really need and how you plan to use it. Include interest rates, fees, monthly payments, and tax advantages as you weigh your options. Many financial institutions offer home equity products, including MSUFCU. Take a look at msufcu.org for more information.


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Deidre Davis

Deidre Davis is the Vice President of Marketing and Communications at MSU Federal Credit Union. MSUFCU's headquarters are at 3777 West Road East Lansing, MI 48823. Contact Deidre ad deidre.davis@msufcu.org or (517) 664-7877.

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