Borrow Smart

Feel the need to take a home equity loan? Well, by all means you can go ahead and take that loan, only don’t be in too much of a hurry. That will only induce mistakes. And mistakes are one thing you just cannot afford, what with the interest rates going through the roof. What you need to do is not just borrow but borrow smart. Here are a few tricks you can employ to ensure that you get a good deal:

• Compare: This is something I insist on. Whether it is a loan or an insurance policy, always compare rates. It is a free market and you should be able to take advantage of the competitive streak among lenders. In the case of a home equity loan, the rate you get will depend a lot on your credit score. So if you have a really good credit score – 760 and above – you can easily get a home-equity line of credit for half a point below the prime rate. However, if your credit is not too good, you may have to pay nearly 5 points or more over prime.
• Know the rules: You must have heard from many sources that home equity loans are better than most other loans because you can deduct the interest. Not True—well not always. Another thing is that even if you do get a deduction, your tax break will be limited to interest on loan amounts of $100,000 or less. So if you’ve borrowed more than this stipulated amount, the interest you pay on the excess amount will no be deducted.
• Reflect: It is important to realize that when you take a loan against your home’s equity, you are risking your biggest investment. So borrow only if you absolutely must because when you are ready to sell off your home, you may not get as much as expected.
• Avoid: Using a home equity loan to pay off your credit card debts. Here, you will only be addressing an immediate problem and not its root cause. And you could end up being deeper in debt.