A home equity loan, also known as a 澳洲幸运5官方开奖结果体彩网:second mortgage, lets homeowners borrow money by drawing on the 澳洲幸运5官方开奖结果体彩网:equity value in their homes. Home equity loans exploded in popularity in the late 1980s, as they provided a way to somewhat circumvent the 澳洲幸运5官方开奖结果体彩网:Tax Reform Act of 1986, which eliminated deductions for the interest on most consumer purchases. With a home equity loan, homeowners could de♚duct all of the interest when filing their tax returns.

However, the tax deduction was modified with the passage of the 澳洲幸运5官方开奖结果体彩网:Tax Cuts and Jobs Act of 2017. Starting in 2018 and ending after 2025, you may deduct the interest paid on a home equity loan as long as the money is used for qualified home renovations or to “buy, build, or substantially improve” the home, according to the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS).

Nonetheless, there are still several benefits to home equity loans, such as their relatively 澳洲幸运5官方开奖结果体彩网:low interest rates compared with other loans. However, you can no longer receive an interest tax deduction if you use the funds for personal purchases or to consolidate credit card debt.

How Do Home Equity Loans Work?

Home equity loans come in two varieties: 澳洲幸运5官方开奖结果体彩网:Fixed-rate loans and revolving 澳洲幸运5官方开奖结果体彩网:lines of credit. With both types of credit, you're borrowing money based on a percentage of the appraised value of your home minus any outstanding mortgage debt. Typically, you may be able to borrow up to 80% of the home's value, assuming there's no first mortgage loan.

Your home is used as collateral for the loan. As a result, if you don't repay the loan or line of credit, the mortgage lender can 澳洲幸运5官方开奖结果体彩网:foreclose, meaning the bank takes possession of the ཧhome and sells it to recoup the loan proceeds.

Fixed-Rate Loans

Fixed-rate loans provide a single, lump-sum payment to the borrower. The loan is repaid over a set period of time, usually five to 15 years, at an agreed-upon interest rate. The payment and interest rate remain the same over the loan's lifetime.

Home Equity Lines of Credit (HELOCs)

A 澳洲幸运5官方开奖结果体彩网:home equity line of credit (HELOC) is an 澳洲幸运5官方开奖结果体彩网:adjustable or 澳洲幸运5官方开奖结果体彩网:variable-rate loan that works like a credit card. Sometimes, these loans come with a credit card that the borrower can use for purchases on the line of credit. 澳洲幸运5官方开奖结果体彩网:Borrowers are pre-approved for a certain spending limit and can withdraw money when they need it via a credit card or sp💝ecial checks.

Monthly payments vary based on the amount of money borrowed and the 澳洲幸运5官方开奖结果体彩网:current interest rate. The draw period, usually five to 10 years, is followed by a repayment period when draws are no longer allowed, generally 10 to 20 years. Though HELOCs typically have a variable interest rate, some lenders may 澳洲幸运5官方开奖结果体彩网:convert to a fixed rate for the repayment period.

Benefits for Consumers

Home equity loans provide an easily accessible source of available cash. Although the interest rate on a home equity loan is typically higher than a 澳洲幸运5官方开奖结果体彩网:first mortgage, it is still much low꧋er than the rates on credit cards and other consumer loans. As a result, a popular reason consumers borrow against the value of their homes via a fixed-rate home equity loan is to p🐟ay off credit card balances.

By 澳洲幸运5官方开💖奖结果体彩网:consolidating debt with a home equity loan, consumers get a sinꦐg൩le payment and a lower interest rate. However, they will not receive a tax deduction on the loan interest.

Benefits for Lenders

澳洲幸运5官方开奖结果体彩网:Home equity loans also benefit the lender. After earning interest income and fees on the borrower’s initial mortgage, the lender e🅘arns even more interest and fees on the home equity debt or second mortgage. If the borrower defaults, the lender can repossess the property and sell it to recover the loaned funds—this is called fo▨reclosure.

However, the primary business of a lender is loa♑ning money, not taking possession of homes to resell them. As a result, lenders usually will work 𒁃with borrowers to find a payment arrangement to avoid foreclosure.

The Right Way to Use a Home Equity Loan

Home equity loans can be valuable tools for responsible borrowers. If you have a steady, reliable source of income and know that you will be able to൩ repay the loan, its low interest rate makes it a sensible alt𝓀ernative.

Fixed-rate home equity loans can help cover the cost of a single, large purc𒊎hase, such as a new roof on your home or an unexpected medical bill. A HELOC provides a 🎉convenient way to cover short-term recurring costs, such as the quarterly tuition for a four-year degree at a college.

Recognizing the Pitfalls

The main pitfall associated with home equity loans is that they sometimes seem to be an easy solution for borrowers who may haꦅve fallen into a perpetual cycle of spending and borrowing, spending and borrowing—all the while sinking deeper into debt.

Reloading

Unfortunately, this scenario is so common that lenders have a term for it: “reloading,” which is the habit of taking a loan 澳洲幸运5官方开奖结果体彩网:to pay off existing debt and free up additional credit, which the borrower then uses to make additional purchases. Reloading can lead to a spiraling cycle of debt that often convinces borrowers to turn to home equity loans offering an amount worth 125% of the equity in the borrower’s house. This type of loan often comes with higher fees because, as the borrower has taken out more money than the house🌺 is worth, the loan is not secured by collateral.

If you are contemplating a loan 澳洲幸运5官方开奖结果体彩网:worth more than your home, it might be time for a financial reality check. Were you unable to live within your means when you owed only 100% of the value of your home? If so, it will likely be unrealistic to expect that you’ll be better off when you increase your debt by 25%, plus interest and fees. This could become a slippery slope to 澳洲幸运5官方开奖结果体彩网:bankruptcy.

Home Improvements

Another pitfall may arise when homeowners take out a home equity loan to finance home improvements. While remodeling the kitchen or bathroom may add value to a house, improvements such as a swimming pool may be worth more in the eyes of the homeowner than in the market. If you’re going into debt to make changes to your house, determine whether the changes 澳洲幸运5官方开奖结果体彩网:add enough value to cover their costs.

Paying for College

Paying for a child’s college education is another popular reason for taking out a home equity loan. However, e♔specially if borrowers are nearing retirement, they need to determine how the loan may affect their ability to accom⛄plish their goals. It may be wise for near-retirement borrowers to seek out other options. Note that either type of home equity loan must be repaid immediately in full if the home against which they are borrowed is sold.

The Bottom Line

Home equity loans provide many benefits that allow you to borrow money off the equity in your home. The loan can be used for various purposes, including home repairs, consolidating high-interest-rate debt, or paying for a child's education.

However, it's important not to borrow more than you can repay since your home is used as collateral for the loan. In the event of default or nonpayment, the bank can foreclose, meaning it takes the home and sells it to recoup the loaned funds.

To avoid the pitfalls of reloading, carefully review of your financial situation before borrowing against your home. Also, be sure that you review the 澳洲幸运5官方ℱ开奖结果体彩网:home equity loan draw per♑iod and repayment terms.