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Using The Equity In Your Home - Why Choose A Home Equity Loan?

Aug 17, 2007
Are you in debt? Have you refinanced your debt? If you haven't, you might have heard this suggestion from someone else.

So, what is a home equity loan? First, lets explain what home equity is. It is the amount of ownership you have in your house or the amount of cash you will receive from selling your house today. This equity in your house is what lenders let you borrow against. A loan against this equity in your house is called a home equity loan.

Very similar is the concept of a HELOC (Home Equity Line of Credit). Unlike a loan which is a fixed amount. The line of credit is like having a credit card with a maximum limit of course. Originally, the HELOC was given out for financing improvements around the house. These days the HELOC is used for several other purposes.

So, how is the HELOC or the home equity loan different from any other form of debt. The key here is that the interest on other forms of debt is not tax deductible whereas on these equity loans is.

Lets have a look at an example. Lets say you have a HELOC with a limit of $20000 at an interest rate of 10%. So, you would be able to make purchases like you would with a regular credit card. But, the interest that would accumulate on the amount owed would be tax deductible unlike a regular credit card.

As you have probably noticed, there are some key advantages of this form of credit. You generally have a significant credit line at your disposal for emergency use. The payments you will make can be kept low because the interest terms are usually lower than most credit cards. Don't forget that the interest owed is tax-deductible too. If you had the option of using a card with the same interest terms as your HELOC you would still be better off using the latter.

If you are serious about controlling your debt rather than letting your debt control you, a home equity loan could be a an ideal tool for you. You should calculate the amount of money you would be spending in the form of payments and interest over the total life of the debt in both cases i.e. in the case of a credit card and in the case of a HELOC. To help you with these calculations there are calculators for debt available online.

Before leaving we would want to offer a suggestion. Don't fall in the trap of impulse buying using your HELOC. Limit its use to buying investments or for any emergency situations. According to us thats the best use of it.
About the Author
Tired of making payments and seeing the interests and penalties pile up? It doesn't have to be that way, check out ' unsecured debt consilidation loans for bad credit ' and ' equity in your home,why choose a home equity loan ' to free yourself from debt!
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