Home equity loan is a popular option to get credit for home owners. There are two different types of home equity loans. There is a home equity loan which provides debtor with a lump sum of money that has a fixed interest rate and fixed payments that have to be paid out. Such loans are best used when a known fixed amount is needed and the debtor needs couple of years to pay it off. This is an excellent use for home improvement projects.

Second option is the home equity lines of credit, which operates similarly to a credit card with a fluctuating interest rate. Debtors can use the credit up to the equity in their homes, borrowing money whenever they need it. Some lines of credit may allow the debtor to pay only interest for the first ten years and then the debtor has to pay the interest with the principle. Home equity line of credit is a good option to use for short term borrowing or for emergency funds when they are needed.

One of the most important factors when deciding whether to use a home equity loan is the effective interest rate on the loan. Home equity loans usually tend to have a low interest rate that may be tax deductible. However, some credit cards or even loans for brand new cars may have a lower effective interest than a home equity loan The basic formula for the effective interest rate of home equity loan for a person that can deduct the interest rate = interest rate of the loan * (1-tax bracket rate). If the effective rate is smaller than your other credit option then you might want to consider home equity loan however keep in mind that you are putting your house as collateral.

Debtors should shop at different banks to find the best home equity loan There should be only a minuscule recording fee and no broker or other miscellaneous fees. Debtors should also make sure that there is no prepayment penalty clause, especially if they are planning on selling their house soon.