Home equity loans and lines of credit have become increasingly common since the mid-1980s as property values have soared and homeowners have learned about managing personal debt. Among the reasons for this surge in popularity: attractive interest rates and tax deductibility.

Equity rates
Because home equity loans and credit lines are secured by one's personal residence, lenders consider them almost as secure as primary mortgages. While equity rates generally are higher than rates on primary mortgages, they usually have lower rates than credit cards and auto loans.

Average rates for home equity loans and lines of credit are available from Bankrate.com's current rates of 4,000 financial institutions around the country.

Tax deductibility
Way back in the disco era, most interest on consumer debt was tax-deductible. That was good news for people who got auto loans in the '80s for Pintos and Fieros equipped with the latest eight-track stereo technology. But it was a bad deal for the federal government, which, by the mid-1980s, was hip deep in budget deficits. To reduce the need to raise income tax rates, Congress and President Reagan yanked the tax deduction for consumer interest. Except for mortgage debt. The deduction for mortgage interest remained. That goes for home equity debt up to $100,000.

Another route
While home equity debt has grown in popularity, getting an equity loan or line of credit isn't the only way to extract cash from one's castle. There is also the "cash-out refinance." For a cash-out refi to make sense, mortgage rates have to have dropped, and property values must have risen. This was the case for millions of homeowners in the early years of the 21st century, and cash-out refis were legion.

With a cash-out refi, you refinance the primary mortgage for more than the outstanding balance. Let's say you bought a house for $100,000 a few years ago, and now you owe $70,000. But the home has doubled in value over the years, so it's worth $200,000. You could do a cash-out refi of $150,000. You would pay off the $70,000 outstanding mortgage and take $80,000 in cash. Of course, you could only do this if you could afford payments on a $150,000 mortgage. You can also compare mortgage refi rates to home equity rates.
So far, you have learned what equity is and that there are two kinds of equity debt: home equity loans and home equity lines of credit, or HELOCs. Equity loans are provided in a lump sum, and they are paid off in equal monthly installments over a set period. Home equity lines of credit have revolving balances and work like a credit card.

Rates for equity debt tend to be relatively low, and the interest payments are tax-deductible. There is another way to extract cash from a home's equity, and that's the cash-out refinance, which shares the same rate and tax advantages that equity loans and credit lines have.

Next, we will discuss the decisions to be made before you seize your home's equity: what to do and what not to do with the money and, most crucial, which type to get -- an equity loan or a line of credit.

High Recommended Books


1. 

Mortgages For Dummies, 2nd Edition by Eric Tyson and Ray Brown (Paperback - Aug 27, 2004) Buy new:$11.55    50 Used & new from $7.45 Excerpt - eo a veha wndo rnedlea ent.paym outab entsPar gingmana aym onalpers veha bt.de a ongAm otl het fo sonsrea ityequ orf ni isth eirth rgesu wno ni es.hom arity:popul eyTh ctiveattra anc restinte apt tesra atth ityequ thwi a equityhome- oal page 12: "... to deduct the interest costs on second mortgages known as home equity loans or home equity lines of credit, HELOCS, (see Chapter 6) ..."

2. 

The Insider's Guide to Home Equity Borrowing by Pete Hitesman (Paperback - April 2004) Buy new: $21.95

3. 

10 Secrets to Successful Home Buying and Selling: Using Your Housing Psychology to Make Smarter Decisions by Lois A. Vitt (Paperback - Nov 12, 2004) Buy new:$13.46    52 Used & new from $5.13 Excerpt - page 17: "... to stay in her own community. She obtained a generous home- equity loan and commuted more than a IOO miles a day to ..."

4. 

cka em - ityequ arM anslo 92 nda 01)20 nesli uyB fo 78 new:$14. ditcre sp;&nb veha 83 omebec edUs singlyincrea mp;&a moncom ewn ncesi omfr het .65$1 1980smid- sa erptExc ertyprop - uesval gepa veha 7:12 redsoa ..". nda thwi wnershom Stop Sitting on Your Assets: How to Safely Leverage the Equity Trapped in Your Home and Transform It Into a Constant Flow of Wealth and Security by Marian Snow (Hardcover - Mar 15, 2007) Buy new:$15.61    9 Used & new from $14.68 Excerpt - page 165: "... used up their small savings and tried to get a home equity loan, but no bank would lend to an unemployed applicant. He ..."

5. 

The New Reverse Mortgage Formula: How to Convert Home Equity into Tax-Free Income by Tom Kelly (Paperback - Mar 1, 2005) Buy new:$14.96    26 Used & new from $7.50 Excerpt - page 29: "... In a traditional, forward mortgage, the borrower starts with little equity in the home and a large loan balance. ..."

6

How a Second Home Can Be Your Best Investment: New, Tax-Free Methods for Using a Vacation Home for Recreation, Retirement...AND Investment! by Tom Kelly and John Tuccillo (Paperback - Mar 19, 2004) Buy new:$12.89    59 Used & new from $4.25 Excerpt - page 4: "... (Perhaps the down payment comes from a home equity loan on your primary residence). 2. For most of the year, ..."

So You Want to Refinance: An Insiders Guide to Refinancing Adjustable Rate Mortgages and Home Loans by Kristina, Benson (Paperback - Sep 20, 2006) Buy new: $19.95    20 Used & new from $18.98 Excerpt - page 6: "... By mid 2004, Americans owed $766.2 billion on home equity loans and lines of ..." nb veha 83 omebec edUs singlyincrea mp;&a moncom ewn ncesi omfr het .65$1 1980smid- sa erptExc ertyprop - uesval gepa veha 7:12 redsoa ..". nda thwi wnershomeo a veha wndo rnedlea ent.paym outab entsPar gingmana aym onalpers veha bt.de a ongAm otl het fo sonsrea ityequ orf ni isth eirth rgesu wno ni es.hom arity:popul eyTh ctiveattra anc restinte apt tesra atth ityequ thwi a equityhome- oal

Who Says You Can't Buy a Home! by David Reed (Paperback - May 30, 2006) Buy new:$14.00    65 Used & new from $3.79 Excerpt - page 26: "... With such demand, naturally home values increased. When home values increase, homeowners accrue equity not by paying down the loan and regaining their principal, but by the appreciation in home ..."

How to Buy a House with No (or Little) Money Down, 3rd Edition by Martin M. Shenkman and Warren Boroson (Paperback - Mar 29, 2001) Buy new:$14.78    38 Used & new from $1.65 Excerpt - page 127: "... with a down payment. Parents may have a lot of equity in their own homes. They can tap that equity with a home-equity loan and provide their children with money to use toward the ..."