Understanding the Popularity of Home Equity Loans
Home equity loans are becoming more and popular in the United States. Borrowing money against the value of your home is a common choice among home owners. Why is this? This article explores two main reasons for the surge in this type of loan.
The two main reasons for the trend in home equity loans are the low interest rates and tax deductibility of these loans.
In 1986 the tax legislation changed. This meant that most consumer goods were no longer tax deductible. Using home equity loans meant you could buy things and still claim your purchases as a tax deduction.
Let's look at an example of how home equity loans work. Joan and Mark buy a house for $150 000 and make a down payment of $ 30 000 (20%). To pay the remainder of $ 120 000 they take out a first mortgage. When they closed on their home they had 20% equity. As they paid off the principal amount they got more equity and the value of their home increased.
What if Joan and Mark had paid $ 12 000 on the principal on a property valued at $ 150 000 at the time of purchase, now worth $ 170 000? The equity they had to begin with ($ 30 000) plus the principal ($ 12 000) plus the hike in value ($ 20 000) = $ 62 000 available in equity. They could take out home equity loans for this amount.
Home equity loans are frequently used as a way of making money available. This is because making this kind of loan doesn't have penalties. You will still own your home and what's more banks and lenders see this kind of loan as low risk (you probably wouldn't risk losing your home).
This means that the interest on home equity loans is smaller than for other kinds of loans so you are saving money.
Home equity loans may feature interest rates that are higher on average than those of first mortgages. When compared to the huge interest rates on other lines of credit like cards and department store charge cards they are minimal - especially factoring in a tax deduction on your loan.
So what's the catch? If you are delinquent on home equity loans you could lose your house. In most cases this kind of loan is better aimed at people who are stable and middle-aged compared to younger lenders. Most lenders are 35 to 49 years of age with an income of $ 84 000 and 50 to 64 year olds make up the bulk of home equity lenders.
The short version is that home equity loans are ideal for stable, older people who are prepared to repay their loans responsibly. They offer low interest rates, are tax deductible, and viewed favorably by lenders. If you need extra money this kind of loan may be the perfect solution to your temporary money problems.
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