Home equity loan - how it can benefit you

Home equity loan has become increasingly popular.  There is a number of reasons for this.

Being secured against your home, and therefore is low-risk to lenders,  a home equity loan can help you get a substantial amount of cash rather efficiently and easily. Many people have owned their homes for some time and have paid down their mortgage substantially.  They are sitting on unrealized gain -- their available home equity -- that may be very substantial as a result of the rise in their homes' market value over the years. A home equity loan can thus help them convert their intangible home equity into significant sums of tangible cash, without them having to sell their homes.

Because the cash from a home equity loan is often substantial, it can benefit you if you need cash for "big ticket items" such as:

	funding a business
	buying a second home (your second home loan)
	investment porfolio
	wedding
	building a swimming pool
	major home improvement (this will very likely increase your home's market value
	children's college education
	your long-desired dream car, vacation, yacht ...
	an emergency (eg a hefty medical bill)
	living expenses during unemployment

A word of reminder: while having a large sum of money to spend may make you feel exhilarated, don't forget that you have to pay back the home equity loan!

You can also benefit from a home equity loan by using it as a debt consolidation loan to consolidate your debts to reduce your debt interest or to improve your credit score. This is because, as mentioned before, home equity loan rates are usually lower than the interest rates of other loans, such as credit cards and auto loans.  Therefore by using your cheaper home equity loan to do a credit card debt consolidation will save you some interest cost, and may improve your credit score.

If you are considering a home equity loan to do a credit card debt consolidation, please realize that you are not eliminating your credit card debts, but you are merely transferring them to your home equity loan -- it is merely a credit card debt consolidation, not debt elimination.

You need to consider this: after you transfer all your credit card debts to your home equity loan, can you resist the temptation of uncontrolled credit card spending again?  If you are not disciplined, you may get into another round of burdensome credit card debts.  It may be wise to cut up your credit cards and close out the accounts.  The last thing you want is to take cash out of your home through a home equity loan, and end up where you started from because you did not have the discipline to control your credit card spending.

Using your home equity loan as your credit card debt consolidation loan will bring you another benefit.  It is the tax saving.  Your home equity loan interest is tax deductible, while your credit card interest is not. Therefore replacing your credit card debts with a home equity loan should appeal to you.  In fact, home equity loans and home equity lines of credits have become increasingly popular mainly because of the attractive interest rates and the tax deductibility (click IRS Publication 936 Home Mortgage Interest Deduction for more information).

We have pointed out that transferring your credit card debts to your home equity loan does not eliminate your credit cards debts. These debts still exist, except that now they are in the form of a home equity loan.

It is common for a home equity loan to be structured on a 5-year, 10-year or 15-year repayment period. It follows that the credit card debts that you transfer to your home equity loan will be repaid over a much longer period, but your repayment instalments will be lower.

Spreading out your credit card debt repayment over a longer period may wipe out your credit card interest saving (because the longer you owe the equity loan, the more interest you pay), but on the other hand you may now feel relieved as a result of the lightened burden of repaying your credit card debts, especially if they have been causing you anxiety before you have them consolidated. This "improved mental health" may be viewed as a major benefit to you.

As always, there are pros and cons.  If you default in your credit card repayment, you will not lose your house.  But if you default in your home equity loan repayment, you will lose your house.  Remember that you give your house to the mortgage lender to guarantee your home equity loan.

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