Over the past ten years, home equity loans have increased in popularity and for good reason. Lenders are offering an increasing abundance of loan options. Unlike credit or personal loans, the interest from home equity loans is typically tax deductible. Available home equity products include: conventional loans or second mortgages, home-equity lines of credit, and mortgage refinancing. Although conventional loans offer fixed interest rates, homeowners obtaining an equity line of credit are able to borrow and pay back the loan at their own convenience. Home-equity lines of credit are similarly flexible, although the monthly payments can fluctuate dramatically based upon variable interest rates and the initial amount borrowed. Refinancing an existing mortgage may significantly reduce interest expenses and ease payment schedules. However, loan-related points and fees can inflate the cost as well. Nowadays, most lenders will loan between 80 percent and 125 percent of the equity on a home, calculating an interest rate based upon the loan-to-value rate. Applying funds from a home-equity loan towards renovation projects and home improvements is an investment that will simultaneously increase the value and equity of a home. Utilizing funds from a home-equity line for daily living expenses in place of a credit card is a similarly savvy strategy, one that could end up saving the average homeowner thousands of dollars in interest annually. Home equity loans are also convenient for debt consolidation in the short term, reducing monthly payments and cutting expenses. Online sites such as Bankrate.com, Quicken.com, and Money.com are just a few of the resources available for comparing loan packages and interest rates. It is equally important to research the points and fees imposed by different lenders and rate changes that occur over time on home-equity lines.

Published: July 7, 1998

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