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Should you get a home equity loan?

[Oct 21, 2010.]


Should you tap your home equity given the current economic conditions? Even if your mortgage lender has already approved you for a home equity loan or home equity line of credit (HELOC), that doesn't mean you should necessarily accept the offer. Here are some things to remember about using home equity loans.

Your home as a piggy bank

A home equity loan allows you to borrow against the home equity you've built up. Borrowing money this way can give you access to a lump sum of cash without paying the high interest rates associated with credit cards. With a HELOC, you are approved for a credit line up to a certain limit. You can use as much or as little of the credit line as you want, although some lenders may require you to take an initial advance when you first set up the credit line or may set a minimum amount that must be drawn each time.

For the convenience of borrowing what is basically a second home mortgage, you must use the home as collateral. That means you are agreeing that the lender can take the home if you default on the loan. Decide whether you really want to put the home at risk of being taken in the event of a job loss or some other economic hardship that makes it difficult to keep up with monthly payments on the loan.

Mortgage interest

Interest rates on HELOCs are usually variable and based on an index such as the prime rate, plus a margin, typically 2 percentage points. Some lenders may offer a lower introductory interest rate for a period of time, such as six months. Because home equity loans and HELOCs are second mortgages, the interest you pay is deductible as mortgage interest on your income tax return.

A home equity loan or HELOC can help you pay for home renovations, a business start-up, college expenses or other costs. But take time to carefully evaluate whether it makes sense to tap home equity with a loan. If you are concerned about job security and already have a lot of debt, it's probably not a good idea to get a home equity loan. Work on paying down debt and getting your spending habits under control to improve your cash flow.


About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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