General Guidelines for Handling Home Equity Loans

Home equity loans have exploded in popularity in recent years. This boom in the banking industry has enticed many homeowners to come out of the woodwork and use home equity loans as a source of funding for many different things. While it does have its benefits, it is not always in your best interests. Here are a few general guidelines for handling home equity loans.

Understand the Risk

When you take out a home equity loan, you need to understand that you are risking your house. Many people fail to fully realize this risk. Taking out a home equity loan for a big screen television or a vacation is common practice. If you are thinking about doing this, this essentially means that you are betting your house on a big screen television. Saving for small purchases like this makes a lot more sense instead of risking your house over them.

Consider Tax Benefits

One of the most common things that lures people into home equity loans is the promise of being able to deduct the interest on your taxes. While you can do this, there are a few stipulations. For one thing, you have to be able to itemize your deductions. This means that you have to have enough other deductions that add up to more than the standard deduction before it will do you any good. The majority of people do not have enough deductions that add up to more than the standard deduction. Therefore, it might not help you out. In addition to that, you can only deduct on the first $100,000 of the loan. Therefore, if you take out a major home equity loan that totals more than that, you will not realize the entire tax benefit. If you fit both criteria, you will realize a nice tax savings.

Do Not Borrow Too Much

Many borrowers go into a home equity loan situation thinking that they want to borrow the full amount that they can borrow. While you can borrow most of your equity, this is not always a good idea. In most cases, you will be tapping into your last source of emergency funds. If you don't have anything in savings, this equity is always there for an emergency.

In addition to that, if you borrow the last 20% of your equity, lenders will charge you a higher interest rate for that money. They know that there is a higher risk for this type of loan. If the property value falls and you default on the loan, they will not be able to recoup their money. Therefore, they like there to be a little bit of cushion in case something happens.

Watch the Fees

Many home equity lenders charge high fees just for the right to get a loan. If you have good credit, there is really no reason to pay most of these fees. There will be a few fees, but if you know what you are doing, you can avoid a good percentage of them.

 

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