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Leveraging Your Home's Equity

December 2, 2014

Your home is likely your greatest investment. You have dedicated endless amounts of time and dollars to ensure that you have a safe, secure and comfortable home. When making this investment, you are taking a courageous step in committing to pay for and maintain a house that will require a lot of work in order to preserve its value. Although that sense of accomplishment is one in a million, bills, repair costs and the labor of upkeep will snap you right back to the reality of the situation: it can be costly.

From a long-term financial perspective, one of the greatest benefits of owning a home is that the hours and dollars you put into your house will likely increase its worth and have a positive impact on your total capital. Unlike stocks or bonds, as a homeowner, you have more control when it comes to increasing its value. Additionally, investing in a home provides you with a significant piece of collateral, allowing you to leverage your home’s equity, giving you an advantage when approaching a major purchase or dealing with an unexpected financial obligation.

There are two major options when it comes to using your home’s equity to your personal benefit. The first is a fixed-rate home equity loan, which is a type of second mortgage. One lump-sum is given to the borrower and is repaid over a span of time, typically five to fifteen years. The payment and interest amounts are locked in from the start, and the total amount borrowed must be repaid in full. The second option is a home equity line of credit, which is often referred to as “HELOC”. This is a variable-rate loan that is often compared to a credit card. Borrowers are pre-approved for an amount and are then able to use the money as needed. Monthly payments may vary based on the amount spent and what the current interest rate is. As with the fixed-rate home equity loan, the full amount used must be repaid in full.

When presented with the option to use your home to access cash quickly, many people may jump straight to conclusions without evaluating the benefits and risks. Home improvements, tuition payments, credit consolidation and purchasing a second home are all worthy causes for taking advantage of your home’s equity, but it is important to realize what you are getting into before you are in over your head.

Benefits:

  1. Interest rates are typically lower than credit card interest rates.
  2. Interest paid on a home-equity loan can be tax deductible.

Risks:

  1. Your house is used as collateral and can be repossessed by the bank if you neglect payments.
  2. Although using a home equity loan for home improvements can be beneficial, spending money on the wrong type of improvements may not increase its value in the long-run.
  3. If your spending and borrowing habits are bringing you significantly deeper into debt, a home equity loan may be a burden to your overall financial well-being.

As with any financial situation, it is pivotal that you take the time to evaluate the benefits and risks as well as consider your personal situation. For some, a home equity loan may be just what they need to take that next step to improve their overall financial well-being. For others, it may be a setback to taking control of dangerous spending and borrowing habits. Speaking with a lender is a great option if you are interested in evaluating your personal situation more closely and hearing an objective opinion from an expert.

Jim Oosterman is the Vice President of Melrose Bank. He can be reached by telephone at 781-665-2500, online at melrosebank.com or on Facebook at facebook.com/MelroseBank.


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