What You Need to Know about Home Equity Loansa model home with money around it

Home equity loans, also known as second mortgages, are a useful avenue to explore for many homeowners. This type of loan leverages the equity you have in your home and makes a lump sum payment to you based on that equity. Your credit union or bank is a good place to begin when exploring the options for home equity loans

Benefits of a Home Equity Loan

Since equity has value, you can use your equity as a source of cash when you need it. While home equity loans could have a higher interest rate compared to first mortgages, they are well below the interest rates on credit cards and other types of loans. If your credit card debt is high, consider a home equity loan to pay off the debt and obtain a lower interest rate going forward. Interest paid on home equity loans is also tax-deductible, which will help lessen the weight of your tax burden.

Be Responsible

It's important for you to be responsible with the money you obtain from a home equity loan. If you use it to pay off credit cards and then run the balances high again on those credit cards, you will be putting yourself in a precarious financial position. Since your home is the collateral on a home equity loan, you could lose your home if you default on the loan. Make a plan to spend responsibly according to your needs, take out a home equity loan, and stick to your plan. Use financial consultants if you need to; they can assist you in crafting the most efficient plan to utilize your loan.

Be Selective

One reason many homeowners take out a home equity loan is to remodel their home. This can be a slippery slope if you are making improvements that may seem worth it to you, but don't significantly increase the market value of your home. It's important for you to research the market values of homes in your area and see what has sold recently. Make sure the improvements you are considering are worth the money spent and assure that their value will cover the interest costs incurred by both your first and second mortgages.

It's also important to consider your age when deciding if a home equity loan is for you. College funding for your children may seem like a worthy cause to take out a second mortgage, but first take your age into account. If you are nearing retirement age and your income will be going down, this must be factored in before making a final decision. Again, financial consultants can advise you on these types of projections.

Shop Around

At BMI Federal Credit Union, we provide excellent resources on home equity loans for homeowners. With our community-focused, member service mentality, we can offer more attention and accessibility than a big bank would be able to provide. Contact us to get started - we are eager to help you learn more about home equity loans.