Home Equity – Time to Cash In?

Susan Schneider, Nederland.  Low interest rates, rising home prices in Colorado and a strong job market are fueling a return among homeowners to home equity loans and home equity lines of credit (HELOCs).

 
Tapping into your current home value can be a good option, under the right circumstances, for homeowners seeking to fund renovations or other property improvements, consolidate debt or cover a major expense.

 
Although they have similar names, home equity loans and home equity lines of credit are different.

 

While both use the equity in your home as collateral, a home equity loan provides a lump sum disbursement to the borrower and a home equity line of credit provides a maximum line limit to be drawn for usage or paid down at any time during the life of the equity line.

 
Although both offer low rates and tax advantages, there are specific advantages in choosing either a home equity loan or home equity line of credit.

 
Home Equity Loans

 
Low interest rates – A home equity loan rate is much lower than rates for credit cards and other consumer loans, mainly because lenders view it as lower risk. The fact that it’s secured by your home gives lenders confidence in your ability to repay the loan.

 
Tax benefits – You will likely be able to deduct 100 percent of your interest payments, unlike for personal loans. You could also potentially deduct up to $100,000 of home equity debt if you itemize deductions ($50,000 if married and filing separately). Consult a tax adviser for further information regarding the deductibility of interest charges.

 
Speed and stability – Home equity loans carry fixed interest rates that will not vary during the life of the loan. Credit cards and other types of loans can raise APR’s or carry variable rates or annual fees. You will also receive an amount of cash immediately, allowing you to use it to consolidate debt, or for expenses such as home improvements, medical bills, college costs or other purchases.

 
Home Equity Lines of Credit

 
Low interest rates – Like home equity loans, interest rates for lines of credit are lower than for credit cards or other types of loans.

 
Tax benefits – As with home equity loans, you will likely be able to deduct 100 percent of your interest payments, as well as potentially being able deduct up to $100,000 of home equity debt if you itemize deductions ($50,000 if married and filing separately). Consult a tax adviser for further information regarding the deductibility of interest charges.

 
Flexibility – Once you obtain a line of credit, you are able to draw on it as needed, making payments only when you use it, similar to using credit cards. Frequently, the homeowner pays interest only for a period of time and only later paying principal as well. Some homeowners rely on a line of credit as a cushion for emergencies and might never tap it.

 
Variable rates – A homeowner with a line of credit has the option of refinancing by either combining it with a mortgage or replacing it with a second mortgage, depending on how much equity the owner has in their home.

 
There are some circumstances in which a home equity loan or line of credit might not be the best choice, and you should consider other financing options. For instance, they are often not the best option for short term expenses because you might pay more in interest even though monthly payments might be lower; or if you are planning to sell your home soon, because the loan would need to be paid in full at the time of sale. An exception could be if you used the loan for home improvements to increase its value, thus obtaining a higher sale price that allowed you to repay it. Another example would be college expenses – depending on your financial situation, it might be more cost effective to obtain low-interest federal student loans than to seek a home equity loan or line of credit.

 
Tapping into your home equity can be attractive because it’s relatively easy, affordable and available.

 

Your banker or financial advisor can help you evaluate your situation so you can determine how much debt you can afford and whether a loan or line of credit is appropriate for your overall financial plan.

 
Susan Schneider is the Nederland Banking Center Manager for Centennial Bank and Trust. Reach her at 303.679.2244 or sschneider@centennialbanking.com. NMLS 935624.

 
Member FDIC and Equal Housing Lender.

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