In the 1965 television series Get Smart, Agent 86, Maxwell Smart, did everything to not live up to his name. Luckily, he had the brilliant and beautiful Agent 99 to help him overcome all obstacles and ultimately finish as a winner. As Max would say, "If you don't mind, 99," we'd like to step in and offer some smart advice on home equity loans that you can believe.
Know Your Budget
Home equity loans are highly structured. You apply for a specific amount, you receive the money all at once, and then you repay in fixed monthly increments. This structure is ideal for funding a planned expense like a home remodel or new car purchase. If you can't budget the expense accurately, a home equity line of credit (HELOC) might be more appropriate.
Leverage the Tax Advantages
Borrowing from your home's equity may give you access to certain tax breaks that you don't receive from being indebted to credit cards or auto loans. Since home equity loans are a type of mortgage, the interest you pay on them is tax deductible for most people who itemize deductions, within certain limits.
Everyone's situation is different, however. That's why it's best to talk with your financial advisor to understand how the additional mortgage interest will affect your tax liability.
Set a Little Aside
Home equity loans have many potential uses. In addition to acting as a home improvement loan, they can be a lifesaver when tackling unforeseen expenses. If possible, avoid tapping all your equity to ensure that there's additional funding if an emergency arises.
Be a Savvy Shopper
Before you select a lender, research current home equity loan rates and shop around to get the best deal possible. If you have good credit, you should be able to obtain an equity loan with no closing costs. Be on the look-out for application fees, appraisal fees and broker fees in particular; you don't want those added to your loan balance. A recording fee might be unavoidable, but this money goes to the local government's recording office, not the lender.
Their low rates and allowed tax deductions make home equity loans a very attractive way to borrow money. However, there's a risk in using them too much. Home equity loans and lines of credit may be affordable, but other types of consumer lending don't put your home at risk if you fail to keep up with the payments. Their ready availability can also temp you into using them for non-essential expenditures that it might be better to fund through other means that don't put your home on the line.
Their long repayment periods - up to 30 years – can also disguise just how much debt you're taking on because your payments will remain low. You'll just have to keep making them for a long time. And continually tapping your home equity delays the day when you own your home free and clear, which is an added financial burden in itself.
Be Smart to the Max
Agent 86 might say that it's the old "use-your-home-equity-intelligently-to-enhance-your-life" trick. He should know. After all, his last name is Smart.