Finance Globe

U.S. financial and economic topics from several finance writers.
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Avoid these Common Home Equity Loan Pitfalls

Are you considering the benefits of taking out a home equity loan? For many, this is the best way to get the money they need for a home improvement project, to pay an unexpected debt, or some other need.

While there are many advantages of using a home equity loan, compared to other options, this can also get you into a lot of trouble if you don’t know what you are doing.

Three Common Pitfalls

Below are three common home equity loan pitfalls to avoid:

1. Using the loan to escape a bad financial situation. If you do this, you are swapping one bad situation for another. The only difference is this: with a home equity loan you are now putting your house in the line of fire. Is that a risk you are willing to take?

Note: a home equity loan is secured by collateral, in this case your home. If you don’t make your payment, the bank has the right to come after your property.

2. Interest is not necessarily tax deductible. It is a common belief that interest paid on a home equity loan is deductible, but this is not always the case. In order to take advantage, you must file an itemized return.

Note: your tax savings is not dollar for dollar, but instead depends on your tax bracket.

3. Tapping into your equity now may prevent you from doing so later. For example, you could take out a home equity loan to put an addition on your home. While this may give you more space, it may not be something you necessarily “need.” If all your equity is tied up in this type of project, if you find yourself facing an unexpected crisis in the future, such as a large medical bill, you will not have this option available to you.

Before you apply for a home equity loan and sign on the dotted line, it is important to consider the pros and cons. When discussing your situation with a banking professional, ask these questions:
  • How large of a home equity loan can I obtain?
  • What is the interest rate?
  • What is the term?
  • Is there any penalty for paying off the loan early?
When you avoid these home equity loan pitfalls, among others, you never have to concern yourself with making a poor decision that could haunt you in the future.
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Tuesday, 05 March 2024

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