Home Equity Loans
The (positive) difference between what your home is worth and what you owe to the bank for your home is called home equity. When a bank loans you money against that equity, it’s called a home equity loan.
Unless you already own your home free and clear, getting a home equity loan is the same thing as taking a second mortgage out on your home.
The plus side to that is you can get up-front funding for your home energy remodel. Sometimes at attractive interest rates.
But there are some rather serious downsides to home equity loans as well:
1) Generally, you can’t sell your house unless you get enough money to cover what you owe on your first and second mortgages. And that means if the value of your home dips due to market fluctuations or foreclosures in your neighborhood or any other cause, you could be left with a home that’s worth less than what you owe on it. And that’s never good.
2) If you fail to pay your second mortgage/home equity loan, the bank can maneuver to foreclose your home. When you take a loan out against your home, you are putting your house up as collateral — as a promise to pay — and that means the bank can take your home away if you don’t pay the loan.
3) This loan negatively impacts your credit rating, which could effect the interest rates your credit cards charge, what you end up paying on any cars you try to finance in the future, and a myriad of other factors all tied to credit ratings.
4) Only the interest you pay on this loan is tax deductible; the principle is not.
These reasons are why we generally recommend using PACE Funding instead of home equity loans. In comparison to home equity loans, PACE Funding:
- Won’t affect your ability to sell your home,
- Won’t put your home at risk
- Doesn’t impact your credit score like a home equity loan will, and
- Allows for 100% tax deduction of the entire payment, including both the interest AND the principle.