Home Equity Loans - What's Right For You

You should always approach good deals with a skeptical eye. When it comes to financial decisions, be downright cautious. After all, your hard-earned money, your future, and your children's future are at stake. Take the time to gather the facts and study your options.

I'm sure many of you have seen the ads touting how easy it is to consolidate your Credit Card Debt by taking out a home-equity loan. Have a huge debt? No problem, you can take out a loan for more than the value of your house, in fact up to 125% of your home's value.

A home-equity loan is, in many situations, a smart way to borrow money. The interest rate is usually lower, and the interest is tax deductible. In addition, home-equity loans are amortized over approximately 15 years rather than about 4 years for credit cards. In other words, the monthly payment on a home-equity loan is much lower than a required minimum credit card payment.

Danger lurks, however, with the temptation to borrow all of your home equity to pay off your debts. A quick and easy solution to be sure and it's promoted my many companies, but it leaves you with no reserve. A certain percentage of people will end up in debt again, and then face the very real possibility of losing their house.

Worse yet are the special programs offered by some companies where you borrow past the value of your home. Typically, these loans are not considered tax deductible. In fact, by law interest on any part of a loan that exceeds 100% of the value of your home is not deductible. Also, lenders usually charge higher rates since it is basically an unsecured loan. (Any Mortgage for up to but not exceeding your home's actual value is considered secured by the home itself.) Plus, these loans may have interest rates as high as seven or eight percentage points over traditional mortgages. You could possibly end up shelling out double the money for what you'd pay for a regular mortgage or home-equity loan.

The safest way to go would be to settle for a traditional home equity loan, stay within your means, and most importantly, learn to research the facts and manage your money carefully.