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Home Equity Basics
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home equity
Pros and cons of equity debt

Taking out a home equity loan: Pros
  • In most cases, borrowers can deduct the interest on loans up to $100,000 on their taxes.
  • The loans carry lower interest rates than credit cards and unsecured personal loans.
  • They can be used for lots of things: debt consolidation, home improvements, tuition, medical costs, emergencies and big-ticket items.

 

Taking out a home equity loan: Cons
  • If you default, you could lose your home, your biggest asset.
  • Such loans can be a risky spending tool for younger homeowners who are not established in their careers and have less experience owning a home and managing money.
  • The loans can be risky for older homeowners who would be tapping their nest egg close to retirement.
  • Credit lines have variable interest rates, so monthly payments can rise, even if your income doesn't.
  • If your home's value drops, you can end up owing more than the house is worth -- a bad situation if you need to sell the house.
  • Using an equity loan to pay off debt might make monthly payments cheaper but could cost you more in the long haul, because you're taking much more time to pay off the debt.
  • You might not be able to lease your home during the term of your loan.

 

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Is it wise to max out your HELOC?

Dear Dr. Don, I have a 3.25 percent adjustable home equity line of credit. The draw period on the HELOC ends next April when it will convert to an amortized 20-year home equity loan at the 3.25 percent adjustable rate.... Read more

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