What You Should Know about a Home Equity Loan

As you pay down your mortgage and your home rises in value, you build considerable equity in it. Having equity is good, but it also means that your money is trapped, and you may want to use this money for other purposes, such as financing a home improvement project. With a home equity loan Texas residents can tap into some of this equity. There are some things you should know about before choosing this option.

You Have to Have Enough Equity to Qualify: You will need to have enough equity in the home to protect the bank and you. If the home is worth $300,000 and you borrow that amount, you will have a hard time selling the home for a price that is high enough to pay off the loan, especially if the property values go down.

There Is a Choice between a Line of Credit and a Loan: You can structure the borrowing in two different ways. The first option is the home equity loan, which works like a traditional mortgage. The second is a home equity line of credit. This will allow you to borrow a certain amount at a variable rate over a certain time period. You don’t have to borrow the full amount all at once and it works similar to a credit card.

Mortgage Interest Should Be Tax Deductible: One of the benefits of a home equity loan is that the loan interest is tax deductible. Deducting your loan can save you money but you will need to itemize your deductions in order to claim the tax break. You will want to figure out if taking the standard deduction or itemizing will save you more money.

These Loans Are Usually Higher Rate Loans: While a home equity loan has a much lower rate than a credit card, the interest is still higher than a mortgage. A home equity loan and line of credit are considered second mortgages. If your home is foreclosed on and sold for less than the combined balance of the two different loans, then the second mortgage would come up short. This higher risk means a higher rate.

There Are Some Risks: While borrowing against the home can make sense for a number of different situations, there are some risks. If you take too much out, you could owe more than your house is worth. If you are in financial trouble and aren’t able to pay back the second mortgage, you could lose the home. It’s important that before taking out a home equity loan, Texas residents can make sure they can actually make the payments for the duration of the loan. It’s also important to weigh out the risk for what you are using the money for.