Also know as a Home Equity Loan, these are loans that can be used for a variety of reasons. Traditionally, a Home Equity Loan is used to make improvements to your home that you may have purchased with a home mortgage. These loans can be very attractive over a traditional unsecured line of credit, because a home equity line of credit gives you tax deductions.
Many people will roll other loans and debt into a home equity loan, such as a car loan or credit card debt, so they can consolidate the loans at a lower interest rate, and the interest they pay on the home equity loan is tax deductible.
Open Ended vs Closed End Home Equity
An open ended home equity line of credit is very similar to having a credit card. Itâ€™s a revolving debt that you may dip into from time to time. This is typically a good choice when you are making continual improvements to your home. You wouldnâ€™t want to have to take out multiple loans in a short time period to cover the costs. The open ended home equity line allows you to borrow, pay off, and then borrow again. Or you can borrow, borrow, and borrowâ€¦ and then pay down the home equity line when the time is right.
A closed end home equity loan is similar to many other loans in that you borrow a set amount. You borrow it all up front and then pay down the debt until itâ€™s gone. You would not be able borrow additional funds on the same loan. You would need a new home equity loan if you wanted to borrow more.
Whichever home equity option you choose, a line or a loan, your interest is tax deductible.
To get the best interest rate on a Home Equity Loan or a Home Equity Line of Credit, you will probably need to borrow more than $10,000. Most banks will offer you teaser rate that seems nice and low, such as prime plus one or prime minus one. To qualify, however, you need to borrow enough to make it worth their time to give you such a nice rate. Credit Unions usually show you a rate that most people will be able to get.
Like most interest rates, you need to shop around to find the rate that meets your needs. Donâ€™t be afraid to ask for a better rate when applying for home equity line or a home equity loan. If you only apply over the computer, make sure you speak to someone by phone or a branch visit before you commit to a rate.