When deciding on how to fund a home improvement project, pay for higher education, purchase a car or start your own business, there are many financing options available. There are financing types specific to the spend, as well as general short term options such as a credit card or personal loan. Regardless of the reason, a home equity line of credit could be a viable financing option that provides additional long term benefits.
Here are a few things to consider:
Rates are better than other forms of finance – When looking at financing options, the natural train of thought is to get a loan for the specific product you are going to purchase. For instance, if you are looking to finance education you would look for student loans, or if you were looking to purchase a car you might try and secure a conventional auto loan. While these forms of financing are available, if you have equity in your house you will probably be able to get a lower rate for that loan. In cases of short term financing most people will turn to their credit card for immediate financing for smaller amounts of money. An example would be for a home improvement project, which may be as simple as new carpet and paint or as complex as a new addition. In either case, the interest rate on the credit card over the course of 6 months to a year would significantly increase the cost of the project.
Best option for emergencies- Sound financial planning suggests that you should plan for the unexpected. Life insurance and disability insurance is a safety net for you and your family should anything unexpected happen. A home equity line of credit is another safety net when emergency funds are necessary. Typically, the line of credit is larger than you can get with a credit card and the interest rate and payback is much more forgiving. Just because the line is open, it does not have to be used, but can simply be used as a safety net when life happens.
Accrued interest is typically tax deductible – Typically, credit card interest, auto, personal, or store lines of credit are considered a personal interest expense and are not tax deductible. This means that any additional cost incurred through interest will be out of pocket and considered part of the overall cost of the project. When using a home equity line of credit, the interest that you pay as part of the loan is tax deductible. This will help to reduce your overall taxable income and could result in long term savings on the overall cost of the project.