By Kari Johnson on March 15, 2011
.jpg.aspx?width=75&height=75) You may know that your home equity value is the amount of money your home is worth in the current market, after subtracting what you still owe on the house. If you know this, you probably also know that you can receive a secured loan based on the amount which would use your home as collateral in case you failed to pay the money back.
And if you know anything about loans, you know they are not free money. You spend more in the end because of interest.
Some things you should know about home equity interest:
- It is tax-deductible, but only to an extent. If the property (or properties) you have the home equity loan out on is (or are together) worth over $100,000, the interest is not deductible. And if adding the home equity loan to the mortgage makes the amount you have loaned out to you more valuable than the home itself, then only part of the interest is tax-deductible. Most home equity contracts advise you to consult a tax advisor to be sure.
- There are some plans that allow you to pay only your interest monthly, so that you owe the exact initial amount borrowed when the payment window is closing. This will let you know exactly how much you owe on the loan when you are done, as opposed to the chance that your principal will not be paid off at the end of the period by what you pay towards it over time. These, however, can be complicated and should probably not be used unless you understand how they work.
- Home equity loan rates are lower than rates on unsecured loans because this loan uses your home as insurance that you will pay it back, though the rate still depends partially on your credit score. It can also be adjusted depending on the value of your home, where it is located, and, of course, where you take the loan out. You can always compare rates before deciding which bank you want to borrow the money from.
- Quite often, home equity loans have the lowest interest rate of any other loans, unless you take out a 125% Home Equity Loan. The rates are higher because it is partially unsecured.
As with any loan, you always need to compare interest rates of a variety of banks before choosing one. With this loan, your home is on the line, so it is best to be as cautious as possible. That includes choosing lower interest rates so that the amount you pay back is not twice as much as the initial loan. |