HOW MUCH? - home equity loans and lines of credit.

Common misconceptions about home equity loans and equity lines of credit.


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 credit options.

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 mortgage, home buying mistakes, refinancing tips, choosing home loans, equity loan tax advantages, home refinance
homeowner insurance, private mortgage insurance

Related topics: home equity lines of credit, National Association of Mortgage Brokers, home equity credit lines




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