A house is among the most important purchases most people will make in their lifetimes. It represents years of earning interest and mortgage payments. Following some equity has built up in the property, obtaining a house equity loan or line of credit might be an appealing method of gaining access to money for funding a college education, funding a significant purchase or paying for home repairs. But tapping into your home’s appreciated value may pose some issues.
Number of Loans
Home equity lines of credit, that remain open for use like a credit card, and home equity loans, that can be one-time lump sum payments, both comprise maximum limits set by law. Depending on the form of home equity loan you apply for, the limit is generally around 70 to 85% of your home’s value. It follows that during a depression from the home market, you will not be able to borrow as much as when property values are greater. Waiting to borrow from the equity in your house until you need the funds means possibly settling to get a credit limit based on the house’s value at that particular moment.
Interest Rates
Home equity loans generally feature fixed interest rates, but home equity lines of credit commonly come with variable interest rates. Adjustable interest rates might not be too important if you plan to pay off the line of credit quickly, but over time that they can rise sharply, which makes it difficult to satisfy monthly obligations. It’s important to research the conditions of a credit line, including how soon the creditor can raise interest rates and how often they can do so in the future. Be aware of what the highest interest rate will be. Comparing lines of credit from different lenders adds time and effort to this procedure for acquiring financing. Additionally, variable interest home equity loans are often tied into the national prime rate. This means that borrowing against your house when the prime rate is reduced increases your odds of paying a higher interest rate in the not too distant future.
Tax Concerns
Though home equity loans and lines of credit can quality you to get a tax break, you might not be able to deduct as much of your own loan payment as you initally proposed. Federal tax deductions for interest on home equity loans are based solely on a proportion of the interest that you pay rather than on the full amount. Additionally, homeowners in a high tax bracket can quickly meet with the maximum deduction, so home equity interest payments will have no effect on the total amount of tax they will payfor.