Home Loan Genius - Mortgage Loans - Home Equity Loan

Home equity loans are attractive to borrowers for a few main reasons:

They typically have a lower interest rate. Home equity loans are currently exceedingly competitive, so shop around. The interest rate you pay on the average home equity line of credit is generally lower than the interest rate you will pay on the average credit card or other type of non-secured debt. While the rate is very important you should also consider the costs of the loan. During the loan process, the lender may order an appraisal to determine the value of your property. Although you may not have to pay for the appraisal up front, the cost usually runs from $250 to $350, depending on where you live. Some lenders will charge a yearly fee for the loan; others charge points or closing costs. You may also be charged for title checks and credit reports.

They are easier to qualify for if you have bad credit. Of course, you should stop and wonder why lending institutions are so eager to thrust money in our faces. The answer is simple. The lenders aren't really risking anything. Since you'll use your home as collateral, the lenders may legally confiscate your house if you can't make the payments. For this reason, you have to consider the consequences very carefully before you make this move.

Payments on a home equity loan are tax deductible. The interest paid on credit cards is not tax deductible. For home equity lines of credit, you can generally deduct the interest you pay. If your line exceeds fair market value of the property, the interest may not be tax deductible. Consult with your tax advisor regarding the deductibility of interest. But you should know that you can only take advantage of this tax deduction on a home equity loan if you file a tax return that itemizes deductions.

Borrowers can get relatively large loans with this type of loan. With a home equity loan or a line of credit, you borrow against whatever equity you have in your house. Equity is the portion of the home that you actually own. For instance, if your house is worth $175,000 and there's a $100,000 balance on the mortgage, your equity is $75,000. Lenders will almost always loan you 80 - 90% of your equity, which in this case would be at least $60,000. Some lenders will approve a loan that equals 100% of your equity and sometimes even 125% or 150%. It's unwise, however, to borrow more than your home is worth. If you do that, you could be paying on a loan for a decade or more and still not even own the lot your home sits on!