The Home Equity Loan - Good or Bad?

Without delving into the financial cogs that make home equity loans work and by avoiding all of the percentage signs and APR numbers, here's the ultimate question. Are home equity loans good or bad ideas? Answer for yourself:

Buying a Car

I notice that the interest rate on a home equity loan is lower than that of a new car loan. I'm going to then take out an equity loan to pay for my new car and take advantage of the lower interest rate as well as the tax deduction that equity loans offer.

Good Idea:

While car loans are not eligible for tax deductions, home equity loans usually are eligible. Interest is lower with the equity, and the deduction saves some money at the end of the year.

Bad Idea:

If you already have loans against your house or the car is extravagant and exceeds the value already paid on your home, you've now taken an equity loan for what is referred to as 125% of the value of the home. These loans which exceed the fair market value of the home are not eligible for the tax deduction.

In addition, equity loans offer lower interest rates in trade for long term payments. In the end this might not save as much as you think since the loan is drawn over ten or even fifteen years. Consider the lifetime of the vehicle being purchased; the loan may out live the car.

Paying Off Debt

My credit card bills are getting too high. Since I'm paying such high interest on them, it's a good plan to pay them off with a home equity loan and then work to pay off that loan instead. I will still take advantage of the low interest and the tax deduction.

Good Idea:

Yes, consolidating makes sense while paying off credit card bills, and the equity offers the low term and the deduction once again. In comparison to those interest levels paid on the credit cards, the interest on the equity loan will save money as you work to pay off the accumulated debt.

Bad Idea:

This is a good idea as long as you adjust your spending habits at the same time. The biggest concern with taking loans to pay off credit debt is that your cards are once again clean slates upon which more charges can be made. Now the problem is that you have an equity loan as well as a credit card loan and you cannot afford to pay either one. Don't go in debt trying to get out of debt. Also, watch the 125% home equity loan as mentioned above.

There are many debates about the value and problems associated with using home equity loans to fix outstanding debt. There is no quick fix. Be aware that poor credit equals higher interest rates, and many loans are offered with low introductory rates that skyrocket after six months or even a year. The predation of the loan companies has become fierce; question everything before signing. Remember, with a car loan you put your car on the line if you can't pay. With a home equity loan, it's your home that you lose if you haven't budgeted correctly.