What are the advantages and disadvantages of a Home Equity loan?
Advantages: – The interest rate you will pay on a home equity loan is generally lower than the interest rate you pay on the average credit card or any other type of non-secured debt. – The interest you pay may be tax deductible. You should always consult with a tax advisor regarding the deductibility of interest. Disadvantages: – Your home is pledged as collateral, so if you default on the loan payments or any other terms of the loan agreement, you could lose your home. – Depending upon the total amount of debts pledged on your home, you would possibly realize a smaller profit from the sale of your home since all of these debts must be satisfied with the sale.
A lower interest rate/monthly payment and a potential tax deduction (please consult with a tax advisor) are the two major advantages home equity loans have over other types of debt. Since a home equity loan is secured by your home, it poses less risk to a lender than does a non-secured personal loan or credit cards – this lower risk is passed on to you in the form of a lower interest rate. The second major advantage is that regardless of the way a home equity loan is used, the interest you pay on the first $100,000 you borrow may be tax deductible. Credit cards and other types of non-secured loans do not have this tax benefit. This means that if you pay $3,000 in interest on your home equity loan, you will reduce your taxable income by $3,000 at the end of the year. If you use a home equity loan for home improvements or to buy another home, you can deduct the interest paid on the first $1 million that you borrow. The reason for this is that home improvement loans are similar to first m
