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.
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.
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.
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
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.