Tap Your Home's Equity

by Center for Personal Finance editors

Home equity loans make home improvements possible, and can help with other financial situations as well. Perhaps you want to buy a car, finance an education, launch a small business, or even borrow in case of an emergency.

A home equity loan, or second mortgage, allows homeowners to tap into their home's built-up equity--the difference between the amount the home could be sold for and the amount still owed.

There are two types of home equity lending: a standard home equity loan or a home equity line of credit (HELOC).

With a home equity loan you receive a lump sum distribution and pay it back in equal monthly installments over a set period of time. HELOCs have revolving balances and work somewhat like a credit card. Your available balance grows as you pay off the loan during the draw period.

One of the main reasons consumers find home equity loans so attractive is that the interest paid on the loan usually is tax deductible. As long as the line is $100,000 or less for joint filers, or $50,000 or less for single filers, homeowners generally can deduct the interest on their tax return--even if they aren't using the money for home improvements. Ask a tax professional for details.

Home equity loans from your credit union typically offer some of the lowest interest rates a borrower can get. Visit your credit union today.

May 29, 2006