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Top Five Reasons for a Home Equity Loan

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Tips on whether a home equity loan might work for you

If you are considering taking out a loan, you may be wondering if a home equity loan (HEL) is right for you. Home equity loans are a type of second mortgage that allow you to borrow money using the value of your home as collateral. This is a safe bet for lenders, because they know that they can count on the value of the home, even if you cannot make payments.

Furthermore, the payments may be given priority status when funds are divvied up each month, because keeping a home is such a strong incentive. This is good news for the borrower, because when banks and credit unions feel safe, they are more generous. Here are five reasons why you might consider a home equity loan:

1) You want a low interest rate

Fortunately, the benefits of a home equity loan don't reside solely on the side of the lender. Banks and other financial institutions giving out loans prefer to do so in a way that guarantees them the surest return, so they offer lower interest rates for HELs compared to many other loan types. According to the online banking website LendingTree, "With a HEL, you may choose either an adjustable rate that fluctuates according to variations in the prime rate, or you may opt for a fixed rate. A fixed rate enables you to budget a set payment monthly without worrying about increasing costs should interest rates rise."

This low interest rate can be beneficial to you if you have high-interest debt on your credit card. According to Erik Carter, contributor to Forbes, "refinancing high-interest credit card debt with a home equity loan or line of credit can make sense, since your interest rate could be much lower and tax deductible."

2) Your credit score is low

It can be easier for people with low credit scores, something especially common on account of the economic troubles of the recent recession, to qualify for a HEL compared to other types of loans. Borrowers who find themselves unable to borrow the money they want at a favorable interest rate should look into a home equity loan.

3) You want to borrow a large sum

Even people with good credit may need to borrow against the value of their home in order to receive a large sum of money. If you are in a situation where you want to borrow a lot, such as to start a new business, a HEL could be a great option for you.

4) You need a lump sum

The main difference between a home equity credit line and a loan is that a loan is distributed in a lump sum with set monthly payments, while a credit line allows you to draw funds from a set limit depending on varying monthly needs, like a credit card. If you need your money all at once, like for the down payment on a second home, a loan can be a better choice than a credit line or a credit card.

5) You can get a tax deduction

Another potential benefit of a home equity loan: the interest you pay can be tax deductible. Your tax advisor can help you determine if this is a possibility.

If a home equity loan sounds like a good option for you, or if you have questions about these great benefits, please give us a call.

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