A home equity loan is a loan that allows homeowners to borrow money against the equity in their homes. Also known as a “second mortgage,” this type of loan became extremely popular in the late 1990s as a means of helping consumers get around changes that were made to the tax code that got rid of deductions for interest charged for consumer purchases. With a second mortgage, homeowners can borrow as much as $100,000 and still qualify to deduct all of the associated interest on their tax returns.
There are two different types of home equity loans available to consumers. The first is a fixed rate loan and the second is a line of credit. Both are generally available in terms that can range between five and fifteen years, and both also require the entire loan to be repaid in the event that the house is sold. However, there are distinct differences associated with each type:
Fixed Rate Home Equity Loans – This type of home equity loan provides the member with a lump sum payment. The loan is then paid by the member over a set period of time at a set interest rate. Both the interest rate and the payment amount stay the same throughout the length of the home equity loan.
Equity Line of Credit – This type of home equity loan provides the member with a pre-approved spending limit that allows money to be drawn out when needed via checks or a credit card that is tied to the line of credit. It works very similar to a credit card or other type of credit account, with monthly payments based upon the amount of money borrowed. There is a set term assigned to the line of credit, just like with the fixed rate loan, which requires the member to pay any outstanding amounts in full at the end of the term.
Why Get a Home Equity Loan?
There are many benefits available to Bristol and Plymouth County credit union members who apply for a home equity loan. While the interest rate for a home equity loan or second mortgage is generally higher than the first mortgage loan, the rates is still much lower than the average credit card rate.
A home equity loan, whether you choose an equity line of credit or fixed rate loans, is tax deductible up to $100,000. Many credit union members use this type of loan to pay off and consolidate debt into a single, lower interest rate payment. The tax benefits associated with this type of loan is also a definite plus.
The main reasons home equity loans are chosen over other types of loans include:
- lower interest rate available on this type of loan
- payments or interest may be tax deductible
- relatively large loans can be available through this type of lending
- members may be able to qualify easier for equity loans
How to Use a Home Equity Loan to Your Advantage
For Bristol and Plymouth County credit union members, a home equity loan can be used as a financial tool for responsible borrowers. Your credit union will help you determine whether or not you will have the means to repay the loan, provide you with the best interest rate available to members and can help you learn how to take advantage of beneficial tax deductions.
Some members use a home equity loan for big repairs and renovations to their home, such as a new roof or fence, while others take advantage of the low rates to help pay unexpected bills, such as medical or automotive related. Short-term recurring costs, such as a child’s college tuition, is another common reason for taking out a home equity loan.
To avoid taking out a loan you don’t need or can’t afford, speak with your credit union representative to make sure you understand all of the terms of the home equity loan. Learn all you can about the difference between an equity line of credit or fixed rate loans to ensure that you choose the best type of loan for your situation and select a term that will work with your future plans and needs.
Where to Find the Best Home Equity Loans
The best place to find a home equity loan that is uniquely designed to meet your needs is at your local credit union. St Anne Credit Union in New Bedford, Massachusetts serves customers who live or work in Bristol and Plymouth counties and has been in business since 1911. If you are looking for a home equity loan and would like more information about getting an equity line of credit or fixed rate loans, speak with your credit union representative for details.