By Claude L’Heureux
Senior Vice President, Community Bank of Oak Park River Forest
Do you have a large expense coming up? If you own your home, a home equity loan may be a good way to borrow money at a low, fixed interest rate. Here are a few tips to help you decide if a home equity loan is right for you.
What is a home equity loan?
A home equity loan, sometimes called a second mortgage, allows a homeowner to borrow money against the equity in their home. The more equity you have in your home, the larger the size of your loan may be.
What’s the difference between a home equity loan and a home equity line of credit?
A home equity loan is a lump sum loan, while a line of credit is available to use whenever you want. With a line of credit, you have a maximum loan amount and a timeframe, and during that time, you can borrow against that line of credit as often as you wish, up to the maximum amount. If you repay a portion of the loan during that time, you can borrow those funds again.
Another difference is that a line of credit has a variable interest rate, while a home equity loan has a fixed rate. Finally, the payments for your home equity loan won’t change on a monthly basis, while the line of credit payment may change based on your balance or interest rate.
How does a home equity loan work?
Most home equity loans require that you pay them off within 15 years, though the terms may vary. The interest rate on the home equity loan is typically fixed. This means your monthly payment will remain the same until the loan is paid off.
What can a home equity loan be used for?
You can use a home equity loan for nearly anything you want. Many people use it to pay for repairs or upgrades on their home. Others may use it to pay for their kids’ college. Some homeowners may use the funds to pay off high-interest debt, if they qualify for a low interest rate on their home equity loan.
Who should consider a home equity loan?
If you need a lump sum of money for something important such as a home repair project, you may want to consider a home equity loan. The rates on home equity loans tend to be lower than rates on credit cards, so this can be a more economical option than paying for large projects with a credit card. Also, the interest paid on a home equity loan is sometimes tax deductible, so this may be an added financial bonus.
Whether you are thinking about home repairs, paying for college, or looking to pay down high interest debt, it’s important to consider the pros and cons of a home equity loan. If you have questions about home equity loans, please contact me at 708-660-7006 or email@example.com.