Using Home Equity LoansReducing Debt With Home Equity LoansA home equity loan or line of credit allows you to borrow money, using your home's equity as collateral. This will help you out of debt and it's called debt equity.Home equity loans and lines of credit have become increasingly common since the mid-1980s as property values have soared and homeowners learned about managing their 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. Tax deductibility: 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. People borrow against their home's equity for myriad reasons. The two most common are to pay for home improvements and to consolidate debt. Other uses for equity money: to pay tuition, medical expenses, living expenses during unemployment, and big-ticket purchases. Pros of taking out home equity debt: In most cases, borrowers can deduct the interest on loans up to $100,000 on their taxes. Cons of taking out home equity debt: If you default, you could lose your home, your biggest asset. |