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Home Equity Borrowing

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With summer in full swing, many homeowners find themselves in need of extra cash to pay for a vacation, unexpected bills, college tuition, a new car, home repairs or home remodeling. A home equity loan or a home equity line of credit can solve this need.

A home equity loan is secured by the equity value in the borrower’s home and the homeowner uses this equity as collateral for the loan. Home equity loans are useful for people who need a fixed sum of money quickly – for a short-term need – to pay for such things as medical bills, debt consolidation or a new car.

A home equity line of credit (often referred to as a “HELOC”) may be viewed as a form of revolving credit, with your home serving as collateral. The maximum amount of a home equity line of credit is generally the same as for a home equity loan. As with a home equity loan, the homeowner can usually use the proceeds from the line of credit as he or she sees fit. And as the balance on the line of credit is repaid, the funds become available for use at some point in the future. Home equity lines of credit are usually used for ongoing expenses, such as paying for college tuition, home improvements or recurring medical bills.

Home equity lines of credit work much like credit cards but with some clear advantages. Home equity lines of credit typically have lower fees and interest rates than do typical credit cards, so paying off high-interest credit cards may be a good use of a home equity line.

A home equity line of credit requires the same documentation as a home equity loan – a credit check and home appraisal – and is easy to apply for. Once an amount is approved for a line of credit, the homeowner can continue borrowing up to the maximum.

One of the most attractive benefits of a home equity loan or line of credit versus other consumer credit options is the ability to deduct on your income tax return the amount of money you pay in interest. If you’re a married couple filing jointly, you may be able to deduct the interest paid on up to $100,000 of home equity debt, or if you file separately, the deduction may be the interest paid on up to $50,000 of home equity debt. This makes the effective interest rate you pay on a home equity loan less than the actual rate on the loan itself.

Your home’s equity represents a powerful financial tool when used wisely, but home equity borrowing should not be taken lightly—it requires a high degree of financial discipline. Before taking out a home equity loan, make sure you’re comfortable pledging your home as collateral. If you are unable to repay the loan at some time in the future, it’s possible that you could lose your home.

Be sure to consult with a tax advisor or accountant about the tax implications of a home equity loan or line of credit in your specific situation, and be sure to contact us today if you have any questions about home equity loans and lines of credit or any other product that could help you meet your financial goals.

As always, if you have a suggestion that would make your banking experience with Middleburg Bank even better, please send me an email at newsletter@middleburgbank.com.

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