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Pros and Cons of a Home Equity Loan

By Derren Peters

Owning a home has plenty of benefits, from tax breaks to personal pride. One of the financial advantages for Texas homeowners is the ability to draw money from the equity built up in their property. Home equity is like a savings account you can access through a home equity loan. Compared to other loan types, there are many advantages to taking out a home equity loan. Tax deductions and a lower interest rate are two of the big benefits. And as a equity loan is secured by your home, it's less of a risk for the lender than a non-secured personal loan or credit cards. The lower risk results in a lower interest rate, and interest payments on the first $100,000 you borrow are tax deductible.

If you apply a home equity loan toward home improvements or the purchase of another home, you can deduct the interest paid on the first $1 million you borrow. This is because home improvement loans are, for tax purposes, categorized similar to first mortgages. Consult a tax advisor to discuss the specific tax benefits available to you.

As with any financial transaction, there are risks involved. Borrowing from your home's equity reduces your own level of equity (or ownership) in the property. You're essentially trading a piece of your ownership stake for cash. There are interest charges on the loan, and other costs associated with taking out a home equity loan, similar to the fees you paid when first acquiring your home.

The biggest risk of all is the fact that your home is on the line, and could be lost if you fall into default. As well, home equity loans can be difficult to get, with the common roadblocks being lack of equity, impaired credit, or inadequate income to support additional borrowing.

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