Borrowers who have accumulated equity in their homes, may use it to take out a Home Equity Loan. In other words, your equity in your home, may be used as a collateral for this type of loan. More often than not, the terms of a Home Equity Loan will be much better than the terms of loans which have no collateral. Still, the interest rate of this type of loan will be influenced by your credit score. An attractive feature of this type of loan, is that you have a lot of freedom on where you use this money. You can use the funds provided by this type of loan to improve your home, purchase other real estate, college education, etc.

Another attractive feature, is that you can deduct the interest charges on this loan when you file itemized income tax, as opposed to using the standard deduction.

EXAMPLE:

You bought your home 10 years ago for $200K. You financed this purchase through a mortgage, and up-to-date, you have paid $120K of it. The current market value of your home is $300K. In this case, you would have $220K of equity, and if you wanted, you could use it to get a Home Equity Loan.

SOME VARIATIONS OF HOME EQUITY LOANS:

• Home Equity Loan:
  • this type of loan is the best choice when you need a lump sum amount of money
  • you will have to pay closing costs
  • interest rates are fixed for the life of the loan
  • interest charges are deductible when you report itemized income taxes
• Home Equity Line of Credit:
  • this type of loan is best when youll need multiple amounts of cash at different times
  • generally there are no closing costs
  • interest rate will vary (this type of loan is like a credit card)
  • some of the risks include an upswing of interest rates; your credit will be reviewed every three years, and the availability of this line will depend on it; you may pay only interest, and accrue a balloon payment by the end of the loan (this can be trouble if you are not prepared to refinance or settle the payment by the due date)

Using your Home Equity as a collateral for a loan or line of credit can be a good resource if you make informed decisions and act responsibly. Please use the resources listed below to gain a better insight on whether to take out a loan using your home equity as a collateral, and if so, what type of loan is better for you.

The Federal Reserve Agency issued a good list of questions and answers that introduce you to important aspects of Home Equity Lines of Credit, and how these differ from a Home Equity Loan: http://www.federalreserve.gov/boarddocs/meetings/2009/20090723/heloc_keyQs.pdf

This is an extensive booklet from the Consumer Financial Protection Bureau, CFPB, which thouroughly explains the ins and outs of Home Equity Lines of Credit: http://files.consumerfinance.gov/f/201204_CFPB_HELOC-brochure.pdf

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