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Home Equity Loans and Lines of Credit 101 (HELOC)

What Are Home Equity Loans and Lines of Credit?

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A home equity loan is a loan secured by the equity in a house or apartment you already own. The equity is the difference between what you already owe on the house and the amount you could get for it if you sold it. For example, if your house is worth $150,000 and you owe $70,000, the equity if $80,000 ($150,000 minus $70,000 = $80,000).

You can get the loan as a lump sum (all in cash now, which is called a Home Equity Loan), a line of credit (where you take the money as you need it, called as expected, a Line of Credit), or a combination of the two.

The process can usually be completed quickly, and there are no restrictions on how you use the cash or credit you receive. You may even be able to get a home equity loan or line of credit without any closing costs.

Home equity loans are often used to replace high-interest rate debt, such as credit cards debt, with lower-rates. This can lower your total monthly expenses, since the home-equity loan payments may be lower than those of the debt you're replacing.

While the amount available is traditionally a percentage of the equity in your home, some loan programs now allow you to borrow as much as 25% more than your home is worth.

Watch out for the sales techniques of agents who try to get you to borrow more than your home equity. Despite what they might say, interest on amounts over and above your home equity is not deductible. Also, these loans tend to have higher interest rates and closing costs than a traditional home equity loan. Plus, if you sell your home, you may not get enough to pay off your debt -- which you and your estate will still owe.

It's sometimes possible to add the value of personal property to the value of your house when borrowing against it, allowing you to borrow more.

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