You may be able to use the equity in your home to your advantage with a Home Equity Line of Credit, or HELOC. While the idea sounds simple, the details of a HELOC can be confusing. Here are a few common HELOC myths explained.
Myth: A Second Mortgage and a Home Equity Line of Credit are the same thing.
There are two types of loans that use the equity in your home as collateral. They are either a Second Mortgage (also known as a Home Equity Loan) or a Home Equity Line of Credit. Each works differently and which loan type works best for you is often determined by the purpose you have chosen to take out the loan. The interest rate the bank charges on either of these can take several factors into account, such as your credit score, the loan to value or the loan type.
A Second Mortgage, or Home Equity Loan, is simply borrowing money, using the equity in your home to secure the loan, much as a personal loan may use the equity in a car to secure the loan.
A Home Equity Line of Credit is a revolving loan that works very much like a credit card. The equity you have in your home secures a credit line with a variable interest rate that is available to you for a certain amount of time (usually ten years). The monthly payments are determined by how much money you owe the Bank, not by how big the line of credit is. As you pay down the amount you owe on your line of credit, the rest is available for other uses. The line of credit works well for do-it-yourself projects or a series of projects because you only make payments on the money you’ve already used.
Myth: I can only use my HELOC on purchases for my home.
A Home Equity Line of Credit can be a great way to get that new roof or finally finish the lower level, but it can also be used to buy a new car or to pay for a college education. The flexibility of a HELOC means you can make your home equity work for current financial needs. In addition, the interest you pay on a Home Equity Loan or Home Equity Line of Credit may be deductible on your federal tax return. The interest you pay on car loans, credit cards and almost all other loans definitely is not. We suggest you consult your tax advisor regarding interest deductibility.
To learn more about Home Equity Lines of Credit, visit our website or contact your local Merchants Bank today.
Loans are subject to credit approval.