Home equity loans

Building equity in your home can be a major advantage if you need to borrow money. Your equity can serve as collateral in a home equity loan, which typically offers better terms than other types of loans. With a home equity loan, you’re often able to borrow more money at a lower interest rate. And, in many cases, you can deduct the interest you pay on the loan when you file your tax return, reducing the actual cost of borrowing still further. Most of the other interest you pay, on car loans or personal loans, for example, isn’t deductible.

Understand the risks

These two incentives — low interest rates and tax savings — have made home equity loans extremely popular. But there are some risks when you borrow against your home. The biggest danger is that if you default, or fall behind on repayment, you could lose your home through foreclosure. That means the lender takes over the property and becomes the owner. That’s true even if you’ve made all the payments on your first, or primary, mortgage.

For that reason, most experts recommend using home equity borrowing for major expenses rather than day-to-day needs. Home equity loans are frequently used to finance home improvements or pay tuition bills. If you can add loan repayment as a regular item in your budget without creating too much strain, then home equity borrowing can be a wise choice.

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