Home equity accumulated in the property is the difference between
the amount you owe to the lender and the current market value
of that property. A home equity line of credit is an ongoing ability
to tap into home equity.
You only make payments if you carry a balance, similar to a
credit card account. A home equity loan, on the other
hand, is a closed, one time loan, on which you make monthly
payments until it is paid in full.
The most common misconceptions about equity loans are:
1. Assuming that interest on equity loans is always tax deductible.
While this is true in many situations, including paying off
credit card debt, car loans, student loans and the like, in some
circumstances the interest will not be tax deductible. Always
check with a tax specialist.
2. Presuming that equity loans will be cheaper than other loans.
Even if the interest is tax deductible, credit cards or car loans
can be cheaper. Calculate the effective rate(interest rate
minus the tax savings) of an equity loan and compare with other
Traps you don’t want to fall into:
- Overlooking the prepayment penalty. These penalties are usually
very high, so if you think you might want to sell your house or
refinance in the near future, make sure that you know how much
it will cost you.
- Not understanding the life-cap maximum. Before getting
an equity line of credit, make sure you know exactly how the interest
rate might change in the future.
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- Getting a high limit line of credit. If you have a lot of equity
in your house, getting a large credit
line is fairly easy. However, once approved it will negatively
impact your ability to obtain other credit. Be realistic about
how much you need.
See also: home
buying mistakes, refinancing
home loans, equity
loan tax advantages, home
Related topics: home
equity lines of credit, National
Association of Mortgage Brokers, home
equity credit lines