Home Equity Loans are becoming increasingly popular due to low interest rates and the ability to borrow sizable amounts of money. A Home Equity Loan is based on your the Equity you have in your house, that is, the difference between your homes appraised market value and the amount left on your mortgage. Since a Home Equity Loan is a secured loan, you generally get excellent rates. There is also an added bonus to a Home Equity Loan – Tax Deductions.
Tax Laws changed in 1986, and most deductions that were available at that time were removed. However, they still exist for a Home Equity Loan. Imagine you bought your house for $100,000 and you put 15% down. This means that you would have a mortgage of $85,000 and $15,000 worth of equity in your home. As you make mortgage payments, your equity in your home rises.
How a Home Equity Loan Works:
Now, lets imagine you have paid $10,000 on your property, which was worth $100,000 when you bought it. The property is now evaluated at $120,000. The starting equity ($15,000) plus the amount you have paid on principal ($10,000) plus the increase in the value of your home ($20,000) gives you $45,000 in equity.
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Home Equity Loans usually carry a higher rate than your first mortgage, however, if you compare the rate on a Home Equity Loan with your credit card or other loan types, you will find that the rate is quite low. Also, there is the added benifit that you get a tax deduction on the loan. All this combined makes a Home Equity Loan quite an attractive method of borrowing.
What does worry some people who are seeking a Home Equity Loan is that if you default on the loan the lender could foreclose on your home. However, this is actually rare. Most of the people who borrow with a Home Equity Loan are between 35 and 49 years of age, and make over $80,000 per year in household income. Borrowers who choose a Home Equity Loan are usually quite good at repaying their loans.