Home Equity Loans: Top 5 Things You Didn't Know

Buying a home is one of the largest financial decisions you’ll make, but it can also be among the smartest. A primary advantage of buying a house is that you can build equity through equity loans.

One way to take advantage of this equity is to borrow against it with a home equity loan. However, before you call your lender, there are five things you may not know about this type of loan.

IMAGE: UNSPLASH

1. Equity Loans – They’re Not Designed For Small Projects

Before applying for a home equity loan, you should know how you plan to use the money. Many homeowners invest in renovations and upgrades to make the property more valuable. However, keep in mind that most lenders will only approve a minimum of around $35,000.

In some cases, you may be able to borrow as little as $10,000, but that’s pushing it. So, if you’re looking at a smaller home renovation project, you may not want to use a home equity loan.

2. You May Be Better Off With A Home Equity Line Of Credit (HELOC)

So, what can you do if you want to leverage your current equity for smaller projects, like re-painting the house or updating your kitchen cabinets?

For those types of projects, you can apply for a home equity line of credit. In this case, you get access to a revolving credit line with your equity as collateral.

A HELOC works similarly to a credit card, in that you have a spending limit, but you can borrow as much as you need and pay it back with monthly installments. It’s a much more flexible use of funds than a traditional loan.

3. Your Credit Score Matters

One of the advantages of a home equity loan is that the value of your house determines how much you can borrow.

However, even if you’ve built up a lot of equity over the years, your lender still has to calculate your interest rates, and that’s where your credit score comes in.

As a rule, the lower your score, the higher your rates. However, some lenders (like Jora Credit) offer favorable bad credit loans.

This means that even if your credit score is less than average, you can still qualify for the loan and not have to make massive interest payments each month.

4. You Might Be Able To Deduct Your Interest Payments

If you’re securing a home equity loan to make improvements to your property, the IRS may allow you to deduct your interest payments. This means you can reduce your tax burden and potentially save money for the year.

That said, there are limits to how much you can deduct, and you must prove that the loan was used for home renovations. Be sure to work with your tax accountant to navigate the details of this deduction so you can make it work in your favor.

5. Never Borrow More Than You Can Repay

Since you have to borrow a sizable amount at once, you must set up a reasonable repayment plan. Remember, you must still pay your mortgage on top of the loan balance. The lender could foreclose on your house if you can’t pay the loan by the deadline.

So, before finalizing anything, discuss options with your lender. While personal loans for bad credit can be beneficial, you need to weigh the risks and advantages before signing a contract.