Another source of possible funding for home improvements may be a home equity loan or a line of credit. There are numerous types of loan products available. If you are considering this type of financing, you should check with the lender and your tax accountant to see if the interest payments are tax-deductible.
Can anyone tell me the difference between a home equity loan and a line of credit?
- A home equity loan is a loan secured against your home. It is in addition to your existing mortgage. A home equity loan will provide you with a fixed amount of money, for example $15,000. Upon closing, you would be issued a check and subsequently begin making loan payments on the full $15,000.
- A line of credit is also secured against your home. It is different, however, in that although you are not issued a check, you have access to funds up to the limit of the line of credit. For example, if you had a $15,000 line of credit, you pay interest only on the amount of funds “borrowed” from the account. If you do not draw out any of the money, you do not pay interest. CAUTION: Be careful to make sure that you are not paying “interest only.” Interest-only payments do not reduce the principal (the balance) of the loan. Therefore, you, in theory, would never pay off the loan. As with credit cards, you should always pay more than “the minimum due.” This habit will save you a lot of money over the life of the loan.
WARNING: Always be cautious about using your home as collateral, because nonpayment could result in the loss of your home.
You may be wondering, if a home equity loan or a line of credit is tax deductible, why not get one and use it for all of my major purchases? Well, you could, but home equity loans are often times structured as 10- or 15-year loans. That means, for whatever purpose you spent the money on, it will take a long time to pay it back. Furthermore, homes in most markets have appreciated in value over time. Leaving this appreciation “intact” is an excellent way of building up a nest egg for your future, for retirement, or for your family, etc.
If you need to use your asset (your home) for some important family event—such as a medical emergency or sending a child to college—shop around for a mortgage that is fairly priced, with fair terms and fair marketing.
You have all heard the convincing advertisements regarding debt consolidation. It is in fact true that by rolling the debt from your credit cards, possibly a car or other loans together, you will have one single loan payment that is smaller. But, before you go ahead and do that, think about why you are doing it.
Are you doing it because you feel overextended? Do you have too many debts already? Are your credit cards charged to the maximum?
Then, think about if you do consolidate all of your debts and pay off all of your credit cards—what will happen next? Will you soon thereafter start charging again on the credit cards? Will they fill up faster than you expected? Will you be back in the same situation that you were in before you did the debt consolidation loan?
