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A home equity loan lets you borrow against the value you have built in your home. Because your house secures the debt, rates are often lower than on unsecured credit, but the risk is also higher: if you cannot repay, you could lose the home. Shopping carefully can save a lot of money.

Loan or line of credit?

• Home equity loan: a lump sum with a fixed rate and fixed monthly payments. It suits a one-time expense with a known cost.
• Home equity line of credit (HELOC): a revolving credit line you draw on as needed, typically with a variable rate. It suits ongoing or uncertain expenses, but payments can rise if rates rise.

What to compare

• Interest rate: fixed or variable, and for a variable rate, how it is calculated, how often it adjusts, and whether there is a cap.
• Annual percentage rate (APR): includes certain fees, which makes it a better comparison of loans than the rate alone. Note that HELOC APRs are often calculated differently from loan APRs.
• Closing costs: appraisal, application, origination, title and recording fees. Some lenders waive them in return for a slightly higher rate or a requirement to keep the account open.
• Repayment terms: length of the loan, the draw period on a line, and what happens when it ends. Some lines require interest-only payments at first, followed by a jump when principal begins.
• Prepayment penalties and annual fees.
• Maximum loan-to-value: how much of your home's value the lender will allow you to borrow against, including your first mortgage.

Tips for shopping

• Get quotes from at least three lenders, including banks, credit unions and online lenders.
• Ask each lender for a written estimate of all costs.
• Check your credit report beforehand so you can fix errors, and avoid taking on new debt before applying.
• Be wary of anyone who pressures you or who offers a loan you do not seem able to afford.
• Understand your right to cancel. For certain loans on your primary residence, federal law gives you a short window to rescind.

Use the money wisely

Using equity for improvements that raise your home's value, or to consolidate high-interest debt, can make sense. Using it to fund everyday spending or vacations is riskier because you will still owe the money long after the benefit is gone. Consolidating credit card debt into a secured loan also turns unsecured debt into debt that puts your home at risk.

Tax treatment

Interest on home equity debt is deductible only in limited circumstances, generally when the proceeds are used to buy, build or substantially improve the home that secures the loan, and only if you itemize. Rules and limits are set by law, so check irs.gov or ask us before assuming a deduction.

If you are weighing a loan, contact our office and we will help you consider the cost and the tax effects.