While today's home values are appreciating at a slower rate, your home is still your best resource for realizing your financial dreams.
Here are some examples of how you can put the equity in your home to work to your advantage:
Paying off debt: High-interest credit card debt and unsecured loans wreak havoc on finances. A home equity loan can be the ticket to consolidating debt, reducing fees, lowering payments and retiring the debt sooner. Your interest may even be tax-deductible; ask your tax advisor.
Improving your home: With increased property taxes, home renovations and additions can be a less expensive alternative to moving. Improvements such as a remodeled kitchen, additional bathroom or a swimming pool add to your enjoyment of your home now and its resale value.
Financing education: The Census Bureau reports that, on average, college graduates earn twice as much as high school graduates, making a college education one of the best investments you can make. A home equity loan is one of the most affordable ways to finance that education.
Remember: Hurricane season is upon us. Borrowing against your home's equity to prepare your home for the upcoming storm season is a wise choice.
To protect yourself and your home, educate yourself before you choose your loan. Visit www.federalreserve.gov/pubs/HomeLine for valuable free information to help you determine the best home equity product for your situation.
Home equity line of credit: This pay-as-you-go option lets you "borrow" cash as you need it up to a preset limit. During the draw period, you only pay interest on the portion of the equity line you have used. The rates are usually variable, changing with an index rate such as the prime rate, but are typically lower than credit cards or other installment loans. You'll also want to find out how long your draw period lasts, and what happens to any outstanding balance when the draw period ends.
You also may have the option to lower your minimum monthly payment with interest-only payments during the draw period. This can be a good choice if your income varies from month to month. Be aware though, you'll have to discipline yourself to make payments on the principal on your own or face paying the entire amount when the loan matures.
Home equity loan: With a home equity loan, you'll receive one lump sum and start making payments immediately on the entire amount. If you choose a fixed-rate loan, you'll know in advance what your payments will be for the term of the loan. Or, you can choose a variable rate loan with a lower initial rate; just be sure you know how often your lender can adjust the rate over the term of the loan.
Beware of loans offering extremely low payments or interest rates. The terms that make the loan affordable now may be short-term incentives that will be quickly replaced by higher interest rates and payments. Be sure to ask about prepayment penalties and other costs for obtaining credit.
Whichever option you choose, be sure to ask your bank about automatic payments. You may qualify for a lower interest rate and protect yourself from missed payments and late fees. Remember, with smart borrowing, the equity in your home can pave the way to your dreams.
This article was submitted by Van Canada, Riverside Bank president in Volusia County.