Even though home equity loans have disadvantages, including but not limited to the additional debt and the risk of foreclosure, they also have advantages that make them more beneficial than you may realize. This blog makes a case for home equity loans by highlighting some key perspectives that make these loans more beneficial than most people assume:
1. Tax deductible
When it comes to tax on home loans, the tax deductibility depends on how you use the money. If you borrow a home equity loan to invest in a property that generates taxable rental income, you are entitled to a tax reduction. This is also the case if you intend to do some value-raising home renovations. However, an important thing to note about this type of loan is that the tax deductions do not apply when you borrow to finance things like going on vacation.
2: Lower interest rates
Normally, secured loans have lower interest rates than unsecured ones. Because a home equity loan uses your property as security, it usually fetches a lower interest rate, especially compared to credit card loans that have a high-interest rate as they are unsecured.
When applying for one, it pays to be aware of and factor in home equity loan costs like closing costs and associated fees, which are typically 2% to 5% of the total loan amount.
3: Fixed interest rates
Given the rising interest rates, taking up a loan now could be very costly. Fortunately, a home equity loan gives you a fixed interest rate that doesn’t change for the length of the loan, irrespective of which way the credit market swings. With a set interest rate throughout the loan’s repayment period, you can plan your payments well because you will always know how much to set aside.
4: Lump sum payout
Most loan options, like credit cards, work under a certain limit. You work with a set limit that restricts your transactions. Home equity loans are paid as a lump sum, allowing you to make big purchases at once. For example, if you have a capital-intensive business idea, you can take a home equity loan, get the lump sum, and use it to set it up with everything from the beginning.
This gives you a better chance to break even faster than you would if you had smaller capital inputs over time, which is usually the case with other credit lines.
For example, with SoFi home equity loans, you can access up to 95% of your home equity at a low-interest rate and the flexibility to draw from your Home Equity Line of Credit (HELOC) as and when needed.
5: No limitations on usage
Options like a VA loan set up to help veterans and service people have limitations like purchasing a primary home. This is not the case with home equity loans because you can use your loan as you want and for anything, including the following:
● Paying off credit card debts
● Investing in a property
● Managing medical bills
● Upgrading or renovating your home
● Clearing student loans
6: Long repayment periods
Home equity loans offer long repayment periods, sometimes up to 30 years, thus giving you the breathing space to plan your finances well. The longer the duration, the lesser your monthly repayment amount. You can as well agree to a shorter repayment period of 5 years.
Conclusion
As you can see, even though they are still loans, a home equity loan has some things going for then that could make them an ideal option for the right candidate. However, before you sign-up for one, remember that you still need to keep up with your payments to increase your credit score and retain possession of your home.