Home equity loans information
A home equity loan can be defined as a loan that uses your home as collateral As a matter of fact your home equity is the part of your home that you actually own and this is the guarantee for your loan.
Simply put your home equity is calculated by taking the present value of your home and subtracting your mortgage. For instance, in case if your home is worth $150, 000 and you have a $100,000 mortgage, you have $50,000 of equity in your home. In other word a home equity loan allows you to borrow money using your equity of $50,000 as security for the loan.
A home equity loan, quite a number of times called as a second mortgage, minimizes your equity or ownership in your home. Since it is worth pointing that your home guarantees your loan, if you default on the payments, you can lose your home.
Talking about advantages, a lower interest rate and tax deductions are the two major advantages home equity loans have over other types of debt.
Furthermore since a home equity loan is secured by your home, it poses less risk to a lender as compared to a non-secured personal loan or credit cards - this lower risk is passed on to you in the form of a lower interest rate.
The second pivotal advantage is that irrespective of the way a home equity loan is used, the interest you pay on the first $100,000 you borrow is tax deductible in nature. Apart from that credit cards and other kinds of non-secured loans do not have this tax advantages. This clearly emphasizes that if you pay $3,000 in interest on your home equity loan, you will minimize your taxable income by $3,000 at the completion of the year. On the other hand if you use a home equity loan for home improvements or to buy another home, you can deduct the interest paid on the first $1 million that you borrow. Simply put the reason for this is that home improvement loans are pretty identical to first mortgages for tax purposes. In addition you should consult a tax advisor about the specific tax advantages available to you.
The major downfall of a home equity loan is the fact that your home is on the line and you could lose your home in case if you default on your payments. On the other side of the coin when you borrow from your home\'s equity you also minimize the equity or ownership you have in your home. This clearly pinpoints the fact that you trade ownership or equity in your home for cash that you will use for some other purpose. Apart from the interest you will pay on the loan, there are also costs attached with taking out a home equity loan - these costs are pretty much identical to the costs you paid when you bought your home.
In an ideal scenario a home equity loan can be used for anything from paying off high-interest credit card debt, to home improvements to buying a car. Believe it or not the best uses of a home equity loan improve your financial situation, your home or your future and these consist of debt consolidation, home improvement and education. In other word your money is invested in something that grows. On the other hand poor uses of a home equity loan are to buy a car or to pay for living expenses - the money is spent on something that depreciates or does not create an asset.
Below you will find few famous uses of home equity loans:
Debt Consolidation
Using a home equity loan to substitute number of credit card and other high-interest debt has plenty of advantages. First and foremost the interest rate you pay on your average home equity loan is lower than the interest rate you will pay on your average credit card by 7% to 10% or more. Keeping this aside the interest you pay on a home equity loan is tax deductible where as the interest you pay on credit card debt is not. Furthermore it is worth pointing that a single payment on a home equity loan can simplify paying several credit cards with different lenders and staggered payment times.
Most importantly a home equity loan can also help make spiraling credit card debt more manageable by spreading out the payments over a longer period of time. In case if a home equity loan is used for this sort of reason, you should consider the fact that you may be paying more in interest over the long run if you make smaller payments.
It is of utmost importance that when a home equity loan is used for debt consolidation, you should have a plan for how you will avoid incurring future debt.
Home Improvement
In addition a home equity loan used for home improvement, repairs or upgrades can give you a tax-sheltered way of increasing the market value of your home.
On the other hand if you make home improvements with the specific intent of increasing your property value, (as opposed to making it more comfortable to live in), it 's your job to make sure that the renovation will add the value you are looking for. For instance, a kitchen renovation might recover the money spent and more; where as adding a pool might not.
While a home equity loan in plenty of cases decreases your home equity, when used quite wisely for home improvements, a home equity loan can more often enhance your home equity by rising the market value of your home beyond the value of the loan.
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