If your house is worth more than what you currently owe and you want to use that equity to invest elsewhere, then a home equity loan might be for you. You can use the money from the home equity loan in any way that you choose as long as you have the excess equity. Looking to upgrade your kitchen? Great! If you want money to invest in some stocks, that works too. It’s up to you how to use the money from the loan.

What is a Home Equity Loan (HEL)?

A home equity loan is for a fixed amount of money taken out of the equity you own in your home. The loan is repaid over a set amount of time through agreed-upon payment installations. Typically, you cannot take out more than 85% of your appraised home value, and the rates are determined through various factors including your credit history, income, and the market value of your home. The loan is seen as low-risk by lenders and is a type of second mortgage.

Benefits of a Home Equity Loan

Low Interests Rates: A Home Equity Loan will typically have lower interests rates compared to other lines of credit (personal loan, credit card, etc.). Remember when we said that home equity loans are of low risks to the lender? Because of this low risk, the rates tend to be favorable to the consumer.

They Can Be Tax Deductible*: In 2018, the law was changed to state that HELs are only tax deductible if they’re used to make upgrades to your house. If you choose to use refinance your house to consolidate debt or pay for education for example, you cannot use the refinance for tax deductions.

You Are Paid In Cash: This one is pretty self explanatory; money talks.

Known Payment Amount: The terms of a home equity loan are set in stone and never change, and are therefore easy to budget out over the term of your loan.

You Can Use The Money For Anything: As we previously disclosed, you’re free to use your loan in any manner that you see fit.

Cons of a Home Equity Loan:

Closing Costs and Fees: While your APR will typically be lower than on a credit card or personal credit line, the closing costs of a home equity loan can be significantly higher than opening up another line of credit.

Foreclosure Risks: if you fall behind on your second mortgage payment, then the lending institution that provided the loan can foreclose on your house. The reason that the loan is low-risk for the lender is that your house is the collateral of the loan. It is very important to remember that you’re able to repay your loan. While it is very easy to see the equity in your house and take the money out, it is simultaneously easy to take out more money than you are able to pay back.

Could Get Underwater: While it is rare in real estate, sometimes house values can decline. If you take out the equity you have in your home and your house devalues before you are able to pay off the loan you will be upside-down in your loan.

Is A Home Equity Loan Right For You?

After weighing the pros and cons of a home equity loan with your local lender at United Atlantic Mortgage, it is ultimately up to you to determine whether or not it is a good option for you. The loan is a great option for your secondary home loan if you can afford the payments and need to free up capital to invest wisely.

For more information on what is needed to qualify for a Home Equity Loan, contact UAM for a HEL loan specialist.