Home Equity Loans Can Take the Bite Out of Borrowing: For lower interest rates and a tax deduction.

from the Pentagon Federal Credit Union

If you have a car loan or credit card balances or if you need to borrow for college, home improvements, or any other reason, you're going to pay interest on those loans. Which financing method you choose depends on a number of factors.

Credit cards provide a quick, easy, and flexible means to borrow money, and many consumers have large lines of credit available to them. But beware of penalty fees and teaser interest rates. If you are late with a payment, your interest rate may increase dramatically, or your interest may be calculated on two months' balance, charging you more than double the given interest rate.

To avoid those pitfalls, you could use a personal, or signature, loan with no equity or collateral required. The rate and payments are locked in, you get the money up front, and you know when the loan will be paid off. Though you may pay a slightly higher rate for a no-collateral personal loan than other types of loans, they're better than credit cards for controlling how much you borrow. Or they're a good option if you do not have equity available in your home.

If, however, you have any amount of equity in your home and don't plan on selling soon, consider the benefits of a home equity loan or a line of credit. The equity you've built up in your home (the difference between the present market value and the total of outstanding mortgages and other liens on the property) is probably the most valuable financial asset you have. Tapping that equity is an excellent way to borrow money for two very important and basic reasons. Unlike most types of loans, including the personal loan, the interest you pay on home equity loans is tax deductible. (However, you should always consult your tax advisor for details.) And, in most cases, the interest rate is lower (sometimes much lower) than rates charged by other forms of credit.

With a fixed equity loan, like a personal loan, your rate and payment amount are locked in, you get the money up front, and you know when the loan will be paid off, all with generally a lower rate and the benefits of tax-deductible interest. With an equity line of credit you get the flexibility to spend only what you need at the moment, like a credit card, with variable payments, variable rates, and a possible lump-sum payment at the end of the term. Rates on equity lines, however, are usually some of the lowest variable rates due to the collateral involved, and you also get the benefits of tax deductibility.

A word of caution, however: Home equity loans and lines of credit put your home on the line. They typically involve paperwork, an appraisal, and closing costs--just like when you bought the house. The process can take three to four weeks so planning is essential. And because the size of the loan for which one can qualify depends largely on the amount of equity in the home, new homeowners who haven't had time to build up equity in their property may not be able to borrow the full amount they need. So before you borrow for any reason, carefully consider your options (including their tax benefits).

In addition to home equity loans, Pentagon Federal Credit Union offers lines of credit, credit cards, and personal advantage loans, all at rates lower than many banks and with no fees and no hidden penalties. To learn more about the various types of credit available, visit www.PenFed.org or contact the Pentagon Federal Credit Union at 1-800-247-5626 Credit union loan counselors are unbiased, don't work on commission, and can help you decide which type of financing is best for you.

How much could you save?

Tax savings on interest paid on the first year of a $25,000 120-month
home equity loan at 6.9% APR.

Tax bracket  First year's interest  You save

    15%             $1,576            $236
    27%             $1,576            $425
    30%             $1,576            $472
    35%             $1,576            $551
   38.6%            $1,576            $608

Tax brackets are for married individuals filing joint returns and
surviving spouses.