Home Equity Loans - 3 Tips to Smarter Borrowing

by : Terry Edwards

There is no question that home equity loans have become the biggest tool for homeowners to get their hands on the cash they need. And used correctly, these loans are also a smart way to borrow needed funds for things like medical expenses, debt repayment and home improvements. With that said, here are 3 tips to help you in finding a great deal on a home equity loan.

1. Shop For Rates And Avoid Fees

Many home owners don't realize that lending rates on loans are different. They mistakenly believe that all lenders will loan money at about the same interest rate. Nothing could be further from the truth.

Home equity loan rates could vary by up to 5% in some cases, and on a $100,000 loan that is serious money. Get at least 3 different loan comparisons before making a decision. Yes, that may take extra time, but it could be worth thousands of dollars. Thousands of dollars of your money.

Also, be aware of loan fees. Lenders should not be charging you for an application fee or an appraisal fee. Nor should they add fees into the loan amount. Where a lender may add on a fee is with a home equity line of credit. They may charge an annual fee.

2. Understand Tax Rules

Many borrowers mistakenly believe that interest on any home equity loan will be tax deductible each year. This just is not true.

Interest on loans up to $100,000 may be tax deductible, but any amount over that will not be deductible.

Also, in order to deduct the interest you will have to be able to itemize your tax return. Will you have the deductions to be able to do this?

3. Understand Your Home Is On The Line

Not only are you putting your home on the line in the event you are unable to repay your loan, but you are also sucking out your home's equity. Be sure that you are not planning on moving in the next few years or you could be in financial trouble.

Be careful in using the money for home improvements. Ask yourself if you will be able to get the value back out of your home when you go to sell it. In some cases the answer may be no.

By following these tips you can make a smarter decision in taking out any type of home equity loan.