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February 12, 2020

How to Put Your Home Equity to Work for You

A child heading to college. A new roof or driveway. Updating your kitchen or finishing the basement. Unexpected medical bills. The opportunity to create unforgettable memories on a family vacation. Nearly all of us experience financial challenges like these at some point.
 
One way to meet the challenge is by putting the equity in your home to work for you. Here’s how.

1. How can the equity in my home help? 

Simply put, you can borrow against the equity in your home, which provides the collateral to secure the loan. One way is with a Home Equity Loan. Here you borrow a fixed amount for a fixed time period at a fixed interest rate and make fixed monthly payments, just like your mortgage.
 
The second way is a Home Equity Line of Credit, or HELOC. This allows you to draw funds as needed, up to your credit limit. You repay just the amount borrowed plus interest, thus replenishing the funds available.

2. How do I apply?

You apply to a lender, typically a bank. Often you can start the process online. You’ll be asked to verify your income. The lender usually does a credit check. Be sure to ask about the initial interest rate, how the rate can vary, and what the upfront fees are. The approval process can take several weeks. Once approved, the loan will be “closed,” very much like your mortgage.

3. What will my interest rate be?

Like mortgage rates, interest rates for a home equity loan or HELOC vary depending on the market when you apply. While they are usually higher than interest rates for a mortgage, they are lower than credit card interest. A few community banks (like Brentwood Bank) offer a fixed rate HELOC, but more often the rate can vary over time. The interest rate for a home equity loan is fixed for the life of the loan. Sometimes a lender will offer a lower rate for an introductory period, often six months.

4. Is the interest tax deductible? 

It depends on how you use the loan proceeds. Under new tax rules, interest on a home equity loan or HELOC could be deductible if you use it to substantially improve the home that secures the loan. If the loan is used for other purposes, the interest is not deductible. Consult your tax advisor for more information.

5. How much can I borrow? 

The limit is based on how much your home is worth and what you owe on it. Many lenders set the home equity credit limit by taking a percentage, such as 90%, of the appraised value and subtracting the main mortgage balance.

6. How can I use these funds?

The funds available from a home equity loan or HELOC can be used for any purpose you choose. Your local bank can help you decide what type of loan is better for you, as well as provide the loan or line of credit. Managed responsibly, a home equity loan or line of credit can be a great way to handle your family’s financial needs.

These tips are provided by Brentwood Bank and are for educational purposes only. Brentwood Bank makes no representations as to the accuracy, completeness, or specific suitability of any information presented. Information provided should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Brentwood Bank recommends you consult a professional for any specific guidance you are seeking.