Home Equity Loans

The equity in your home can be a powerful tool when it comes to managing your finances. Your equity, (the value of your home minus your existing mortgage), can serve as collateral for additional borrowing. While there are some risks with this strategy (as with any borrowing), home equity loans usually offer the attractions of lower rates, convenience and potential tax benefits.

How does a home equity loan work?
Financial institutions view home equity as good collateral and are often willing to lend you money against that equity. Lenders may issue you a check or give you a checkbook to enable you to access a line of credit when you need it. There are usually documents to sign and an approval process that is not too difficult. There may be a commitment fee as well.

The amount you can borrow depends on the amount of equity in your home and your credit worthiness. A general rule of thumb is you can borrow up to an amount so the total outstanding debt on your home (including the first mortgage and any other loans where your home is pledged as collateral) is less than 80% of its current appraised value.

The interest rate charged can be fixed or variable, with the variable rate tied  to  a published index, like the prime rate. There are also financial institutions that offer low introductory rates for an initial period, such as six months.  After the introductory term, the rate increases to the current published rate. Usually, you repay the loan in regular monthly installments and with minimum repayments required. With some home equity loans, the minimum payments may only be the interest on the loan and you may be required to repay the loan by a certain date. Refer to the loan disclosure for details.

Benefits of Home Equity Loans

• Convenience - Institutions typically make it easy to apply and their approval processes can be quick. The process is often simpler than if you were applying for a mortgage. With a line of credit, you do not have to use it all at once, you can access the funds when needed and only pay interest on the portion that is outstanding.
• Interest rates - The interest rates charged on home equity loans are usually greater than those on first mortgages but less than those on credit cards. Using the proceeds of a home equity loan to pay off credit card debt will usually save you money.
• Flexible uses-Even though you are borrowing against your house, there is no requirement that the money be used on your house. A home equity loan can be the source of funds for college tuition or even to buy a car. Compare the rates on an auto loan and a home equity loan the next time you are financing a car.
• Tax deductible – Interest paid on most home equity loans may be tax deductible. Check with your tax advisor for details.

Risks
Borrowing against the equity in your home should be considered carefully. Even though there are benefits, these types of loans are like other loans - you pay interest and they must be paid off. Most people use home equity loans for "conservative" purposes and avoid making risky investments or extravagant spending with the proceeds.

Read and understand all the details before signing. Loan documents can be confusing and the easy process of getting this type of loan can mask the costs and risks.

Do you want to make a major purchase, complete a home renovation project, consolidate debt, or cover unexpected expenses? You may be able to use the equity right in your home! Home equity loans and home equity lines of credit (HELOC) feature low monthly payments, potential tax benefits, flexible payment options and high credit lines. At Provident Bank, we can help you find what works for you. Visit a local branch or our website for more information.