Using a Home Equity Loan to Build a Pool
Sure, you can tap your home equity to help pay, however, is it a wise move? Following is a look at the pros and cons.
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Lower rate of interest
A home equity loan generally comes with a lower rate of interest than you would get by using a credit card or personal loan.
Possible tax benefits
The proceeds from a house equity loan can be used for any use, but the interest paid on the loan is tax deductible if it’s used to”buy, build or substantially improve” the house securing the loan, each the Tax Cuts and Jobs Act of 2017. Keep in mind, you’ll want to itemize deductions to take advantage of the tax break.
Fixed interest rates
Interest rates on home equity lines of credit (HELOCs) and credit cards are generally changeable, so if interest rates rise, your payments go up also. But home equity loans typically arrive with fixed interest prices. That makes it more easy to understand.
Puts your house at risk.
A home equity loan uses your home as collateral. The lender could foreclose on your house In case you are not able to keep up with your monthly payments.
Taking out a home equity loan entails fees and closing costs. While those vary by lender, they run between 2% to 5 percent of the amount borrowed.
Higher interest rates
Interest rates on home equity loans are typically greater than those offered for HELOCs. You’re basically forgoing a lower interest rate in exchange for stability at the speed you’ll pay over time.
Time-consuming approval process
The lender will have to review your credit and verify your income, before you can get approved for a home equity loan. It could request a copy of the deed to two years of tax returns, pay stubs or your house. It also could require an evaluation of the house. It typically takes four to fourteen days, although the time that it takes to close on a house equity loan will change depending on the creditor and the complexity of your financial situation.
You might not have enough equity
Lenders limit the amount you can borrow to 85 percent of the value of your house, minus whatever debt will be left on it. Let us say you have a home worth $200,000 plus a mortgage balance of $160,000. Few creditors would let you borrow the full $40,000 of equity in your property. In most cases would be $10,000. (Here is the math: 85 percent of the $200,000 home worth is $170,000. Take out the $160,000 left on the mortgage and you get the $10,000 home equity loan amount).