Your home may be a hidden source of wealth for you and there are many good reasons to take out this type of loan. Home improvements can add to the value of your home. Some improvements are so beneficial that they increase the value of your home more than they cost. But not all improvements are equal. What is of value in one real estate market might not be worth as much in another. Check with local building and remodeling agencies to see what’s hot in your area.
Sometimes it makes sense to take out a home equity loan on a big ticket item like a car or a your daughter’s wedding. If you have assets that could be sold to finance the purchase but don’t want to derail your investment plans, it might make sense to take out a home equity loan.
For an item like a car, you might want to finance it with a home equity loan instead of a traditional car loan because the interest on the home equity loan is deductible. But be aware that you’re putting home up as collateral. If you can’t make the payments, you might lose you house.
Also, some home equity interest is not tax deductible. If you borrow more than the value of your home, that interest won’t be deducible. Also, there is a limit of $100,000 in home equity debt that is deductible. If you’re looking at a home equity loan for tax advantages, make sure that you really will be able to take the deduction.
The equity you have in your real estate is the difference between what you owe and what the property is worth. A home equity loan allows you to borrow money based on that amount.
The amount of your equity isn’t based on what you paid for your house but on what the house is worth. For example, if you bought your house for $150,000 and you have a mortgage for $120,000 that gives you $30,000 equity.
But let’s say real estate prices in your area have increased and an appraisal of your property values it at $200,000. That means that your equity is now $80,000 because you use the new value ($200,000) minus debt ($120,000) to arrive at the amount of your equity.
The amount you can borrow against that equity varies from one institution to the next and is determined by the type of loan you take out.
Interest rates on home equity loans tend to be higher than first mortgages. Look into a refinance option and compare the total cost to a home equity loan. Remember to look at all the costs and fees along with the annual percentage rate before you make a decision.
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