The  equity  you have  in your  home can  be a powerful  tool in managing  your  overall   financial situation. Your equity, the   value   of  your   home   minus  your   existing mortgage,  can  serve  as  collateral  for additional   borrowing.  While  there are   some  risks with this  strategy (as  with any borrowing), home equity loans usually offer the attractions of lower rates, convenience and often tax benefits.

How does a home equity loan work?
Most institutions view home equity as good collateral and are often willing to lend you money against that equity. Lenders  may issue you a special check or give you a "line of credit" that you can access as "overdraft protection" against your checking account. There are usually forms to sign and an approval process that is not too difficult. There may be some form of commitment fee.
 
The amount they will  lend you depends  on the amount of  equity in your  home  and your other  credit  characteristics. A general  rule  of thumb is that they will lend up to an  amount so the  total debt against your home (including the first mortgage and  any other  loans where your home is pledged as collateral) is less than 80% of the current value of your home.

The interest rate charged will  usually be  variable and  will be  pegged  to some  published index, like  the prime rate. There  are  also  some institutions  that  offer   low "teaser" rates   initially and  then raise  the  rates after   a period.  Check   out  the  rate   details.
Usually, you repay the loan in regular installments and with minimum repayments  required. With  some home equity loans, the  minimum payments may only be the interest on the loan and you may be required to  repay the loan at a  certain date.  You  need to read  the details carefully.

Attractions of Home Equity Loans 
Convenience - Usually institutions make it easy to apply and their approval processes  are fast. The process is often simpler than if you were  applying  for a  new mortgage. Once  you are approved, their  commitment acts like a line of credit. You  do not have to borrow it all at once.

Interest rates - The  interest rates charged on home equity loans  are usually greater than those  on first  mortgages but less  than those on credit cards. Using the proceeds of a home equity loan to pay off credit card debt will usually save you money.

Tax benefits - For individuals that itemize their tax deductions, the interest paid  on home equity loans can  help save some  income taxes. While there are some limits on this type of interest deduction, it  may  save you some tax. Consult  with your tax advisor  for more details.

Flexible uses - Even though you are borrowing against your  house, there  is no  requirement that the  money be  used on your  house.  A home equity loan can be the source of funds for  college tuition or even to  buy a car. Compare the rates on an auto loan and a home equity loan the next time you are financing a car.

Beware of the risks
Borrowing against the equity in your home  should be  considered carefully. Even  though there are benefits, these  types  of loans  are like other loans - you pay  interest and  they  must  be paid off. Most  people  use home  equity loans for "conservative" purposes  and  avoid making risky investments or extravagant spending with the proceeds.

Read and understand  all the details before signing. Loan  documents can be confusing and the easy process of getting this type of loan  can mask the costs and risks.

Home equity loans from Palisades Federal Credit Union (PFCU) typically offer  some of the lowest interest rates a borrower can get. Visit PFCU today.