3 Reasons Why Home Equity Financing Is A Smart Option

homes0406_1BY LISA SCONTRAS

As property values on Oahu have gone up for eight consecutive months, so may have the equity in your home.

Home equity is determined by taking the appraised value of your property, less any amount you presently owe. For example, if you owe $200,000 on a home that is appraised at $500,000, you have $300,000 in equity.

According to Derek Wong, Vice President of Retail Credit Products at First Hawaiian Bank, “Home equity is untapped borrowing power. And as your property value increases, so does your borrowing power. As long as your income supports your ability to borrow, tapping the equity in your home is a great resource.”

The most common reasons Hawaii borrowers cite for taking out a home equity loan, according to Wong, are bill consolidation, mortgage refinancing (with no points), home improvement (including energy efficiency), college tuition and automobile purchases.

Wong says, home equity financing is a smart financial choice for three important reasons: 1) the interest rates are often lower than those for other financing options; 2) the interest is likely tax deductible; and 3) using the equity in your home helps you to obtain a higher credit limit.

First, interest rates for home equity loans are typically much lower than for other forms of financing.

“Based on rate surveys locally, most institutions price their home equity loan and lines of credit lower than their unsecured loans and credit cards,” says Wong. “Simply said, using your home’s equity

as collateral offers less risk to the lender and, in turn, a lower interest rate to the borrower. Customers are more likely to make payments on a loan that is attached to their home.”

Second, regarding tax deductibility, Wong explains, “Borrowers need to consult their tax advisor as each situation is unique. Generally, however, home equity loan interest is tax deductible, which makes the net expense of borrowing even lower than other forms of borrowing.

“There is dual benefit as you are already enjoying a lower interest rate and then can offset the cost further with the tax deduction.”

Lastly, while credit cards may be ideal for some purchases, they typically limit credit to $10,000 or $20,000. For major purchases, home equity loans and lines can go quite a bit higher.

“Generally, home equity loans can be approved for much larger amounts than for unsecured financing,” says Wong. “For instance, home equity approvals are typically for $50,000 or more.”

While it’s common to tap equity for home improvements, many homeowners are tapping the power of their equity for other large expenses, such as school tuition and a whole variety of other big-ticket purchases.

The costs associated with an equity loan are low – and generally do not include paying for points, which are normally included in the cost of first mortgages.

“An equity loan can make perfect sense because you have more options on the term you want to finance,” Wong adds. “Home equity payments can be amortized differently, making payments generally lower. There’s also a greater degree of flexibility – customers can make larger payments if they choose and make payments on terms that work best for them.

“For example, with a line of credit, if you wanted to buy a car and pay it off in seven years, you could just make the payments like it was a seven-year loan,” says Wong. “But if you change your mind later on, you can – there is flexibility.”

Right now, consumers can enjoy the combination of appreciation and great rates. If you’re looking for smart options, your home equity may be the answer.

The opinions, statements and views contained in this article are those of the author, and do not necessarily represent the views of First Hawaiian Bank or its management. First Hawaiian Bank does not warrant that the information herein is accurate, complete or current.

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