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The practice of borrowing against
the value of a home has skyrocketed in popularity.
There are two key reasons for this surge: low
interest rates and tax deductibility.
When tax changes in 1986 eliminated deductions
for most consumer purchases, home equity loans became a way
to buy goods and still get a deduction.
Let's say you bought your home for $95,000 and
made a 20 percent down payment of $19,000. You then took a first
mortgage to pay the remaining $76,000. On the day you closed
on your home, you automatically had 20 percent equity. You gain
equity as you pay off the principal and your home grows in value.
Let's say you've paid $12,000 toward the principal
and your property -- valued at $95,000 when you bought it --
is now worth $115,000. Your beginning equity ($19,000), plus
the principal you have paid ($12,000) and the increase in your
property value ($20,000) gives you $51,000 in equity.
Banks and borrowers love it
Equity is a valuable asset because you can put it to use without
having to sell your home. And because most people's domicile
is their biggest asset, lenders regard home equity loans as
secure. For that reason, interest rates are lower than for other
loans.
The average rates for a home equity line of credit
or for a term equity loan are available from Bankrate.com's
current survey of 4,000 banks around the country.
Home equity products usually have a higher interest
rate than first mortgages. (Bankrate.com's mortgage rate survey
will show you those differences.) But compare home equity loan
costs to your credit card or department store charge cards.
Check out Bankrate.com's current credit card rate survey, then
figure in a tax deduction on your home equity loan, in most
cases for up to $100,000 of borrowed money, and you've got yourself
a deal.
The scary part is that if you default on the loan,
the lender could foreclose on your home. That's why these loans
are statistically most suited to stable, middle-aged borrowers.
The average home equity customer is 35 to 49 years old with
a household income of $83,998, according to the Consumer Bankers
Association. Fifty- to 64-year-olds are the second biggest borrowers
of home equity.
Most have held the same job and owned their home
for about eight years. About 2 percent default on their loans.
Article continued at http://www.bankrate.com/brm/green/loan/loan3a.asp?prodtype=loan
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