- There are basically two types of equity financing: A straight loan for a specified amount of money and a line-of-credit, which, like a credit card, has a maximum borrowing limit. You have the option to use these funds when and how you see fit. Interest rates may depend on which type you choose. Equity loans often offer fixed interest rates that apply to the entire term of the loan. Home equity lines-of-credit typically come with adjustable rates tied to a third-party index and their interest rates change whenever the index moves.
- One of the best features about equity loans: You can close the loan fast. In addition to receiving your funds or line-of-credit quickly, your interest rate will reflect current market conditions. Unlike a first mortgage application, with an "unlocked" rate, that takes 4 to 6 weeks to process--wherein the rate could change for the better or worse--equity loans are often approved in a matter of days.
- Consider why you want an equity loan. Even though an equity loan is secured by your real estate, finance charges may or may not be tax deductible. There is a difference between getting an equity loan for college tuition or home improvements, and buying a new car. Should you get an equity loan to pay tuition or to fund home improvements, your interest paid is typically tax deductible. However, should you use the proceeds to buy an auto, take a vacation, or other non-real estate reasons, the interest you pay may not be deductible.
- If you have less than perfect credit, shop around diligently. The home equity interest rates you see that are "at or below prime" or at other wonderful interest rates typically apply only to the best borrowers--those with superb credit scores. If your credit score is less than wonderful, you might have to pay an interest rate considerably higher than your first mortgage rate. Be sure your household budget can absorb the additional monthly payment that is required by having an equity loan.
- Unlike first mortgage loan rates, which fluctuate with the bond market (since most of them are sold) or move because of investment market indicators, equity loan interest rates are a combination of a lender's "appetite" (desire) for new loans, lenders' cost of funds, and other consumer loan rates (personal and auto). Therefore, shop around your local banks, credit unions, and other equity lenders to find the best interest rate.
