Advantages and disadvantages of a home equity loan.
A lower interest rate and tax deductions are the two major advantages
home equity loans have over other types of debt.
Since a home equity loan is secured by your home, it poses less
risk to a lender than does a non-secured personal loan or credit
cards - this lower risk is passed on to you in the form of a lower
second major advantage is that regardless of the way a home equity
loan is used, the interest you pay on the first $100,000 you borrow
is tax deductible. Credit cards and other types of non-secured loans
do not have this tax benefit. This means that if you pay $3,000
in interest on your home equity loan, you will reduce your taxable
income by $3,000 at the end of the year. If you use a home equity
loan for home improvements or to buy another home, you can deduct
the interest paid on the first $1 million that you borrow. The reason
for this is that home improvement loans are similar to first mortgages
for tax purposes. You should consult a tax advisor about the specific
tax benefits available to you.
The biggest drawback of a home equity loan is the fact that your
home is on the line and you could lose your home if you default
on your payments. When you borrow from your home's equity you also
reduce the equity or ownership you have in your home. This means
that you trade ownership or equity in your home for cash that you
will use for some some other purpose. In addition to interest you
will pay on the loan, there are also costs associated with taking
out a home equity loan - these costs are similar to the costs you
paid when you bought your home.