5 Tips for Wisely Tapping Your Home Equity

A home-equity loan is usually the best choice when you know exactly how much a purchase, such as a major home-improvement project, is likely to cost and you need several years to repay it. For short-term borrowing, however, a line of credit may be a better option, especially if you plan to hold onto your home equity in case of an emergency. Here is are five tips to help you determine if you are getting a good deal. Compare loan rates versus line-of-credit rates, which will vary depending on your credit score. If your credit is good, you should not be required to pay any application or appraisal fees, so make sure the lender is not tacking any extra fees onto the loan amount. Be savvy about tax rules that may allow you to deduct the interest on home-equity loans in some instances, but not in others. Specifically, a borrower must itemize in order to receive the interest deduction, but most taxpayers do not take advantage of this because they do not have enough deductions. Know ahead of time the risks of borrowing against your home, understanding that every dollar borrowed is a dollar that cannot be used to purchase the next home. And finally, maintain some headroom by preserving an equity cushion of at least 20 percent in your home. Preserving these funds will give you a source of capital to tap in an emergency. | Read More