Article: Put Your Home Equity to Work

Put Your Home Equity to Work

If you're a homeowner, you work hard to pay for your home. Maybe it's time to put your home to work for you with a home equity loan or line of credit.

With a home equity loan or credit line, the equity you've built serves as collateral. Equity is the difference between your house's market value and the amount outstanding on your mortgage. So, if market value is $150,000 and the mortgage balance is $100,000, your equity would be $50,000. 

You can use a home equity loan or line of credit to borrow for home improvements, college tuition, a vacation, medical bills, a family wedding, starting a home-based business and any number of other major expenses.

Borrowing using the equity in your home offers two key benefits:

• The interest rate will be lower "usually much lower" than what you'd pay on a credit card or personal loan. The lender can offer you a lower rate because your house secures the loan or line of credit.
  
• The interest you pay on a home equity loan usually is tax deductible, which further reduces the cost of borrowing. Consult your tax adviser to find out what deductions you can take.
  
  

When borrowing on home equity, you have two credit forms to choose from.

• A Fixed Home Equity Loan is a lump sum you borrow at a fixed or variable interest rate. If it's a fixed-rate loan, which is most common, your monthly payments stay constant throughout the loan term.

People tend to use home equity loans for large, one-time expenses like a major home-improvement project. You also might use one to start a business, make a big-ticket purchase, or consolidate high-interest credit card debt. This type of loan makes sense if you don't foresee future borrowing needs.

• A Home Equity Line of Credit is an open credit line you can draw on as needed, up to a preset limit. Usually a home equity line of credit carries a variable interest rate tied to some sort of index, such as the prime rate. As you pay off past borrowings, you replenish the credit line up to your dollar limit. You can tap a home equity line of credit again and again, without having to reapply for a loan each time you borrow.

A line of credit offers flexibility and ready access to funds, making it ideal for unexpected expenses like large medical bills. A HELOC also can help finance a child's college education, especially for higher-income families who don't qualify for financial aid.