Home Equity Loan Lowdown

Tried low-rate home equity loans yet?

Want some serious cash in a hurry without risking everyting in the process? Try a low rate home equity loan -- there is very little risk involved and it comes from the funds that you have already put into your home. Livearticles.org reports:

Make sure that the low rate home equity loan that you are signing up for is going to stay at the rate that you are signing up for. In some cases the companies reserve the right to raise the rate as they see fit and that can mean a good many bad things.

Read more: How to Get Low Rates on Home Equity Loan

Interest rates make home equity loans unattractive

A short while back, home equity loans and home equity lines of credit were lucrative sources of funds with exceptionally low interest rates. Now, as interest rates rise to unimaginable levels, investors are concerned about what to do with these credit lines. Suntimes.com reports:

Here's a basic rule of thumb: When the HELOC rate gets to 7 percent or more, pay off the line. That's comparable to getting a guaranteed 7-percent-plus rate of return on your investments. (Do note that paying off your HELOC debt doesn't close the line. It will still be available in case of emergencies.)

Read more: Prime rate pulls rug from under home-equity loan

Do you want to keep your home equity line of credit?

If you have a home equity line of credit, you are probably wondering whether you should keep the credit line, or refinance it. This is a pretty tricky and confusing question, since the rate has almost doubled in the past one year. Until two years ago, home equity lines of credit were great deals. Homeowners had access to money at rates that were lower than those on fixed-rate home equity loans or first-lien mortgages.

However, these good times couldn’t have continued for ever. The fact that credit lines are indexed to the prime rate meant that every time the Federal Reserve raises short-term rates, borrowers' minimum monthly payments go up. Since 2004, the rates have been raised so many times that now the prime rate has gone up from 4 percent to 7.75 percent! There are very few options before borrowers now. They can keep the credit line, pay it off and replace it with a fixed-rate home equity loan, or do a cash-out refinance on the first-lien mortgage and pay off the credit line with the proceeds.

Tax and home-equity loans

You’ve taken that home-equity loan and it is tax time again. So how do you calculate the percentage of the interest that is tax deductible when filing income tax returns? When calculating the exact amount of deductible interest on home-equity loans, you have to take into consideration a few variables. These include your filing status, the fair-market value of your home, origination dates of previous mortgages and remaining debt.

Another thing you can do is get a copy of IRS Publication 936, Home Mortgage Interest Deductions. This publication will provide you with a detailed explanation of how such calculations are made. It also includes a flowchart that will help you know if all or part of your equity interest is deductible. You can either pick up a copy at your nearest federal building or download one. The next best thing you can do to know your tax-deductible interest is get yourself a good accountant who will help you calculate the exact tax-deductible amount.

Know the costs of taking a home-equity loan

If you are looking for a convenient way to borrow money look no further than your home. A home-equity loan is one of the easiest ways to get a good loan at an attractive rate of interest – one that is better than that offered by credit cards and other types of loans. The best part? You get to deduct the interest when you file your taxes. That’s just looking at the rosy side of things. While a home equity loan is great, you cannot take the first loan you get without shopping around. You are leveraging your home for cash and this is no small decision. It is important for you to know the different types of home-equity loans available and also about various other factors before you can take a decision.

One of the first things you need to ask is how much the loan is going to cost you. Remember, the interest for a home equity loan is fixed and is variable for a home-equity line of credit. So based on your means and needs, you will have to choose the type of loan you want to take. Another thing you need to know is that in case you want to pay off your debt before the agreed date, you will have to pay a fee for doing so. This is true of both home-equity loans and home-equity lines of credit.

Next, you have to check the fees of taking a loan. This includes costs like attorney fees, title search, document preparation and insurance. In case of a home-equity line of credit, you may have to pay a transaction fee each time you make a withdrawal. In case you don’t use your line of credit for longer than a stipulated time period, you may even have to pay an inactivity fee. Some lenders waive closing costs and certain other fees. So it is important that you check if your lender offers you such a facility.

Rising rates make home equity loans dearer

Here’s official confirmation of a trend that has seen a cooling off towards the once upon a time favorite home equity loans. Consumers are finally beginning to feel the heat from the interest rates, which have been steadily rising for the past two years. According to certain lenders, homeowners are now backing off their borrowings under home equity lines of credit. These loans have been costing more with each hike by the Federal Reserve.

Rates on home equity loans are tied to the prime lending rates of banks, which in turn follow the Fed’s benchmark rate. This means a slight rise in the latter will make the loans dearer. Of course, there was a time when home equity loans cost less than home mortgages, and this prompted many people to turn the equity in their houses into piggy banks. Now, since these loans cost more than traditional 30-year mortgages, their popularity ratings are dropping fast.

Banks offer Best Home Equity Plans

Due to the increasing interest rates, the growth of home equity borrowing has witnessed a sharp fall in the recent years. Keeping this in mind, lenders are unveiling plans that will help the borrowers to the get the best out of it. U.S. Bank, a unit of U.S. Bancorp introduced a home-equity loan with a rate of 5.99 percent that is fixed for 20 years. J. P. Morgan Chase & Co. reduced the interest rate by half a percentage point for the borrowers on its home-equity lines of credit. The new low interest rate home equity loans are available to the borrowers in five states: New Jersey, Illinois, Connecticut, Michigan and Ohio.

Other banks are also not lagging behind. They roll out plans to offer home equity loans to their customers at a competitive price. Wachovia Corp.'s "win back" program is offering a rate of prime minus 1 percent to certain borrowers who previously paid off their home-equity loans. azcentral.com reports:

Home-equity lending has boomed in recent years as record numbers of Americans have taken advantage of low rates and rising home values to fund their spending needs or pay off high-cost debt. Borrowing against home values added $600 billion to consumers' spending power last year, according to Federal Reserve calculations, with about one-third of that sum coming from home-equity loans and lines of credit.

Home Equity Loans are less than Credit Card Loans

Home Equity loans always cost less than the credit card loans. Individuals, who have their own homes and facing financial problems due to credit card payments, can take home equity loan to repay the existing debts. As home equity loans charge lower interest rates, more people are taking the benefits of this loan. Home Equity is basically a second mortgage on your home. To take loans, you will be required to present your home as a collateral.

In such a case, the lenders can seize and sell your home if you do not make the payments in future. Because equity loans are secured by a property, the lender takes less risk than with unsecured loans such as credit cards. Home Equity loans have low interest rates something between 6 to 7.5 percent. sunherald.com reports:

With a line of credit, you are authorized a maximum amount to borrow, and you can take any amount up to that limit any time you want. HELOCs typically provide borrowers with checkbooks and debit cards. Your monthly statement will show the current debt and minimum payment required, just as a credit-card statement would.