Why a picture of Vegas? Why not a picture of Vegas?

With the increasing popularity of home equity loans and home equity lines of credit (HELOCs), many lenders now offer a special “teaser” interest rate for the first few months of your loan. Make sure you find out how long this rate is in effect for and how much the interest rate will rise once the teaser rate expires.

Remember, if something sounds too good to be true, it probably is. Except, of course, for this kind Nigerian fellow that I correspond with via email. He’s inherited about $8 million through a deceased uncle, and if I send him a couple thousand bucks, he’s split the inheritance with me 50/50. I’m gonna be rich!

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Wow, I get a loan and they won’t even take my car? Where do I sign up?

If you’re looking to buy a new car and you’re thinking of financing your purchase with a home equity loan, check out Bankrate’s handy calculator before you make a decision. It let’s you plug in the interest rates and durations of your car loan and your home equity loan, then it tells you which loan will save you the most money.

Since a home equity loan is typically a longer duration loan than a car loan, your monthly payments will be lower, but a car loan usually has a lower interest rate. In general, a home equity loan will be cheaper than a standard car loan if you’re making extra monthly payments and if you write off the interest on your taxes. If you don’t plan on doing either of those things, then a regular car loan will end up being cheaper. Check out the calculator to see for yourself.

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Consolidation loans and home equity loans work like this: Take one of these loans out. Pay all of your different credit card debt and other debt down with the loan. Pay one monthly payment with a lower interest than what you were paying before. Good deal, right?

It’s only a good deal if you budget and watch your money from now on. A common practice of people who do loan consolidation is that they don’t change their spending habits. They run up their credit cards like normal. So now they have their new credit card debt AND their consolidation loan debt.

Bottom line: Change your spending and saving lifestyle before you decide to take a home equity loan or a loan consolidation and you won’t end up in a debt spiral.

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A few weeks ago, I did a post that covered some home equity loan basics. In that post, I listed one of the advantages of a home equity loan as “Payments are often tax-deductible.” That’s some really insightful information, huh?

How about some more detailed information, courtesy of Bankrate.com. Basically, interest paid on a home equity loan or home equity line of credit of up to $100,000 is tax-deductible. There are a couple exceptions, however.

“When the combination of all loans secured by a home, including the first mortgage and any other equity loans, are more than the property’s fair market value, the interest on the portion of debt that exceeds the home’s value is not deductible.”

So this stipulation only affects you if you have a loan-to-value (LTV) ratio of over 100%. For example, if your home is worth $100,000, you still owe $80,000 on your mortgage, and you have a home equity loan of $30,000, your LTV ratio will be 110% - ($80,000+$30,000)/$100,000. In that case, only interest paid on the first $20,000 of your home equity loan is tax deductible, since the other $10,000 is the portion of your loans that exceeds your home’s value.

One more exception - if you use your home equity loan for home improvements, you can deduct interest on up to $1 million in mortgage debt. In this case, it’s especially important to keep track of receipts so you can prove that your loan really was used to finance home improvements, and not just used to buy that diamond-encrusted cell phone you’ve always wanted.

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1. What is a home equity loan?

A home equity loan is a loan that is borrowed using your home’s equity as collateral. The amount of equity you have in your home can be calculated by taking your home’s value and subtracting off how much money you still owe on your mortgage. Since you are using this equity as collateral, if you fail to pay back the loan, your creditor can sell your house to get its money back.

2. How much money can I borrow?

Well, that depends on several factors, including your credit history and current income, but usually lenders will let you borrow until you reach a loan-to-value (LTV) ratio of 80%. The LTV ratio is is simply how much money you are borrowing (original mortgage + home equity loan) divided by your home’s value. For example: if your home is worth $100,000 and you owe $50,000 on your mortgage, your LTV ratio is 50%. So you will be able to borrow $30,000 for your home equity loan and your total loans ($50,000+$30,000 = $80,000) divided by your house’s value ($100,000) will be at the 80% LTV ratio.

3. Why do people usually take out home equity loans?

The most common reasons people take out home equity loans are for paying off high interest credit card debt, major home repairs, college tuition expenses, medical bills, or even just to buy a car or boat.

4. What are the advantages of a home equity loan?

• Lower interest rate than other types of loans
• Ability to get a relatively large amount of money (depending on the amount of equity you have in your home, of course)
• Payments are often tax-deductible

5. What are the disadvantages of a home equity loan?

There are none! Go get a home equity loan right now!

Only kidding. The main disadvantage is that you’re putting yourself in jeopardy of losing your house if you can’t pay back the loan. So if you’re confident in your ability to pay back the loan, or if you just don’t mind losing your home and living on the street, then there aren’t too many downsides to taking out a home equity loan.

6. What is the difference between a home equity loan and a home equity line of credit (HELOC)?

A home equity line of credit is just that - a line of credit. You get approved for a certain credit line, you can borrow up to that amount, and you only pay back what you’ve borrowed. A regular home equity loan is just a lump sum loan that must be payed back in a certain amount of time.

7. Is a home equity loan right for me?

It all depends. See what kind of rates are available. If you’re currently paying off some high-interest credit cards, a home equity loan might save you some money.

8. Where can i find the best rates for home equity loans?

Bankrate has a nice feature than lets you compare home equity rates in your area.

9. What is the airspeed velocity of an unladen swallow?

What do you mean? An African or European Swallow?

10. How many stockbrokers does it take to change a light bulb?

Dear God! It burnt out!! Sell all my GE stock NOW!!!!

(Ok, so that was only 8 real questions about home equity loans, but 10 is just so much nicer than 8.)

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