The Lowdown on Home Equity Loans

Home equity loans are loans against the value of your home. If you are still paying off a mortgage, you can borrow up to 75 percent against the part of the home you actually own.

There are several plusses when considering a home equity loan. Borrowers see it as an opportunity to use the

value of their home to obtain potentially more sizable loans at lower interest rates. When interest rates are low in general, home equity loans can be very appealing. Often home equity loans are used for major renovations or additions to the home, but they can also be used for an extensive range of other purposes. Another key attraction of a home equity loan is that the interest you pay is typically tax-deductible.

Home equity loans are attractive to lenders because they see a secure lending risk with solid collateral, the house. They will therefore, provide lower interest rates for such loans.

Of course before making the decision whether or not to borrow against your home, you should factor in a lot of variables, primarily your personal family situation. Borrowing to get out of debt and putting your house at risk can be emotionally very stressful and financially risky. Borrowing, with money securely invested, however, to make major home improvements or to buy a small vacation home might be worthwhile. If you are borrowing to pay for something that has appreciation, you can eventually make back the money that you are paying in interest on the loan. Home improvements can increase the sale of your home or a vacation house in a desirable area can be profitable when you sell it.

However, using a home equity loan to buy something that will only depreciate in value or to take a vacation can be costly because you will still be paying off the vacation after it is over and have nothing additional to generate income. Therefore, home equity loans for items that will depreciate are not as common. Sometimes, however, there are important aspects of life that are worth the strain of financially having to tighten your belts, such as adopting a child.

The problem with a home equity loan is not a matter of coming up with the right numbers. It is deciding whether or not you can risk putting your house on the line. An unforeseen emergency, which requires you to lay out a large sum of money, could put you in a situation whereby you cannot make payments on the loan. The possibility of foreclosure then looms large. Many people cannot sleep at night knowing their house is on the line.

Some financial advisors recommend paying off a large outstanding credit debt with the money from a home equity loan or consolidating the debt to have lower interest rates. The problem here is that from that moment forward, the individual must not only stay out of debt, but be very careful in what he or she spends, having taken on a greater risk. And in most cases old habits are hard to break. Therefore, by consolidating, the person may increase the risk of losing his or her home.