New Visitors Privacy Policy Sponsorship Contact Us Media
Baby Boomers Family Green Home and Auto In Critical Condition Just Starting Out Lifestyle Money
- advertisement -
Bankrate.com
News & Advice Compare Rates Calculators
Rate Alerts  |  Glossary  |  Help
Mortgage Home
Equity
Auto CDs &
Investments
Retirement Checking &
Savings
Credit
Cards
Debt
Management
College
Finance
Taxes Personal
Finance

  Home Equity Basics   Chapter 1: What equity debt is
Before tapping the equity in your home, become familiar with the way home equity loans work.
 
   

Why they are popular

 

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. Enter your ZIP code below to start the rate search process.

Enter ZIP Code:

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.

-- Updated: April 1, 2006
<< Previous article | Next article >>  
 RESOURCES
Free! See your FICO score range
Order your free credit reports
Home equity loans vs. lines of credit
 TOP HOME EQUITY STORIES
Home equity can be used to buy car
Interest Rate Roundup
Interest Rate Roundup

TABLE OF CONTENTS
 
 
 
 
 
 
 
 

Home Equity
Compare today's rates
NATIONAL OVERNIGHT AVERAGES
$30K HELOC 4.74%
$50K HELOC 4.53%
$30K Home equity loan 5.36%
Rates may include points
- advertisement -
- advertisement -
 
- advertisement -

About Bankrate | Privacy Policy/Your California Privacy Rights | Online Media Kit | Partnerships | Investor Relations | Press Room | Contact Us | Sitemap
NYSE: RATE | RSS Feeds |

* Mortgage rate may include points. See rate tables for details. Click here.
* To see the definition of overnight averages click here.

Bankrate.com ®, Copyright © 2014 Bankrate, Inc., All Rights Reserved, Terms of Use.