Equity Loan Interest Works Out To Your Interests

2007-03-08 10:33:40

( Financial )



Home equity loans and lines of credit have become a fast growing segment of the loan market. According to census data, one in six homeowners in 2000 have used these loans, from almost nothing in the 1980s. If you need a loan, you will find like many consumers that equity loan interest is the most favorable in the market.

Equity loan interest is lower than any other financing source and has the added advantage of being tax deductible. These two features contribute to the popularity of these loans among homeowners. Home equity loan rate is usually fixed since you get a lump-sum amount at the start of the period to be paid off over ten or twenty years. Equity loan interest for line of credit varies in direct proportion to federal interest rates. Initial equity loan rate in a line of credit may be lower than a fixed-rate loan but could increase in the event of rising interest rates. Because of its variability, equity loan interest in a line of credit still works out to your advantage but over the short term, say within three years.

Tax deductibility of equity loan interest you pay has certain limits. Only interest on the first 100,000 dollars of loan is tax deductible; interest on loan amounts above that limit is subject to tax. In addition, only loan amounts equivalent to or less than 100 percent of the value of your house will create deductible interest.

Because your home is mortgaged as the collateral in a home equity loan, lenders consider it more secure thus less risky. This is the basic reason why your equity loan rate is lower than rate on credit cards or other kinds of loans. Typically, variable rate for home equity loan interest is one to three percentage points above prime lending rate. In some cases, a lender may start you with an introductory rate of one-half to one percentage point below prime, for six months to as long as one year. For this reason, home equity loans can be attractive when interest rates are low but can expose you to much higher interest costs when the fed rate shoots up.

When you take out an equity loan, you will need to choose between fixed-rate and adjustable rate mortgage. Through the help of an equity loan calculator—many choices are available on the Internet—you can quantify these three most important factors: equity loan interest rates prevailing in the market, the length of time you plan to pay the loan, and your willingness to take on financial risk. The trade-off is a guaranteed fixed equity loan interest versus initial lower monthly payments with the possibility of higher future monthly payments in the event of rising equity loan rate in the market.


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