Home & Real Estate

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Borrowing Against Your Home

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When faced with a significant expense, such as medical costs, a new addition to your house, or a child's college education, you may find that you don't have the necessary cash on hand. In such a situation, you may want to consider a home equity loan or line of credit.

By using the equity in your home, you may qualify for a sizable amount of credit, available for use when and how you please, at an interest rate that is relatively low. Furthermore, under the tax law -- depending on your specific situation -- you may be allowed to deduct the interest because the debt is secured by your home.

Before deciding whether to head down this road, you should carefully weigh the costs against the benefits. Shop for the credit terms that best meet your borrowing needs without posing undue financial risk. And, remember, failure to repay could mean the loss of your home.

There are actually two variations on this home equity theme: lines of credit and loans. When comparing the two, however, keep in mind that you cannot simply compare the Annual Percentage Rate (APR) for a loan with the APR for a home equity line because the APRs are figured differently. The APR for a loan takes into account the interest rate charged plus points and other finance charges. The APR for a home equity line is based on the periodic interest rate alone. It does not include points or other charges.

Of course, there are plenty of other factors to keep in mind when considering either arrangement, as we discuss in other articles in this section.