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Taking out a home equity mortgage is a popular way of accessing the value of your home to pay for things that you want or need. Whether you access your home equity as a home equity loan or as a line of credit, there are many reasons why a home equity mortgage makes sense to so many people.
Among the reasons that people are choosing to manage their debts with a home equity mortgage are low interest rates, climbing real estate values and tax deductions. Just like a first mortgage, a home equity mortgage is secured by real estate – your home. Lenders consider a home equity mortgage to be nearly as secure as a first mortgage – so they’re more willing to approve a home equity mortgage. The same security means that they’re also willing to extend excellent interest rates on a home equity loan or line of credit.
As interest rates for other types of credit have spiraled, taking out a home equity mortgage has become a popular way to manage personal debt. One very popular use for a home equity mortgage, for instance, is to consolidate other debts. A person who is carrying $10,000 of credit card debt may be paying interest on that debt of as much as 28% APR monthly. Even when you add in loan closing costs, it makes far more sense for that person to take out a home equity mortgage for $10,000, pay off the credit card debts with that, and then pay off the second mortgage at 5-6% APR.
There’s more to the popularity of taking a home equity mortgage than just interest rates, though. Back in the 1980s, interest paid on most loans was tax deductible. As the national debt grew, however, the government took a long hard look at ways of increasing revenues. Rather than raise taxes, they did away with the tax deduction for interest paid on most kinds of loans. The only interest that remained tax deductible was that on a mortgage on your residence – and that includes the interest on a home equity mortgage up to $100,000.
The third piece of the home equity mortgage puzzle is the climbing value of real estate. Over the past ten years, real estate values have climbed at astonishing rates. Many people found that the home they bought for $100,000 was worth nearly double that, less than ten years later. Since home equity is tied to the present value of your home, a home equity mortgage is one way of accessing the increased value of your home without selling it.
Another increasingly popular way of accessing the extra value of your home is with a “cash out mortgage refinance”, or refi. Rather than taking out a home equity mortgage on the value you have invested in your home, you can choose to refinance your home for more than the amount outstanding on your current mortgage. This can make sense if the value of your home has increased substantially and the interest rates on mortgages has dropped.
Suppose you bought your home for $100,000 five years ago. Since then, the value of your home has increased to $150,000, and you still owe $50,000 on your current mortgage. By doing a cash out refinance for $150,000, you could pay off the remaining $50,000 on your old mortgage, and put $100,000 into your pocket or other investments.
The decision to choose a home equity mortgage or a cash out refinance depends on many factors. Check out current interest rates, home values and your own financial situation, and then decide which is the right option for you.
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