How much can I borrow?

The amount of credit a lender will extend on a home equity line of credit or home equity loan is determined by several factors - your income, debt and other financial obligations, credit rating and credit history, and the amount of equity in the home. If you qualify for a home loan or line of credit based on your income, debt, and credit worthiness, the next step is to determine the amount of equity in the home.

Since the borrower's home is used as collateral for both home equity lines of credit and home equity loans, the amount of money a lender is willing to extend is based on the equity of the home. The amount of equity in your home is calculated by subtracting the amount of the existing mortgage from the home's appraised value. Lenders usually let you borrow around 75 percent to 85 percent of the equity in the home, although this amount varies between lenders and types of loans.

Is the Interest Tax-deductible?

In most cases the interest paid on home equity loans and home equity lines of credit is tax-deductible, but there are exceptions. That is why the small print on home equity loan solicitations always reads "consult your tax advisor," when they are advertising the tax deduction benefit. Although tax laws allow the interest to be deducted in most instances, it is important for homeowners to find out what rules apply to their circumstances before they borrow the money against their homes.

One of the possible exceptions to tax-deductible interest is when the home equity loans raises the combined debt on the home (first mortgage plus home equity loan) to a level higher than the value of the property. Such a situation may occur with a 125 percent loan-to-value program. However, interest expenses may be treated differently depending on how the money was used. Home equity loans used for home improvements are sometimes treated differently than loans used for debt consolidation or college expenses.

What are the closing costs?

Closing costs are fees and expenses paid by the borrower when they take out a home equity loan or line of credit. The costs are similar to those that were charged with the first mortgage process, which may include an application fee, document preparation fee, title search fee, appraisal fee, attorney's fees, insurance fees, and points (a percentage of the loan amount). Some of these charges may have to be paid in advance and others may be due when the documents are signed at closing. It is important to consider these fees as they can add a substantial amount to the overall cost of the loan. Sometimes you can negotiate with the lenders and see if they will pay for some of the fees.

How can I use the funds?

The funds from home equity loans and lines of credit can be used for many things, including home improvements, college tuition, wedding expenses, a new car, travel, medical expenses, and debt consolidation. There are generally no restrictions as to how you use the funds from your home equity loan or line of credit.

Is there an early pay off penalty?

Some home equity loans have a penalty if the total is paid off sooner than the expiration date of the loan term. The purpose of the prepayment penalty is to encourage borrowers to stay with their current lender for the duration of the loan. If the loan has a prepayment penalty it must be mentioned in the loan documents, so it is important to not only ask the loan officer about any prepayment fees but to thoroughly read the loan papers to make sure that the loan does not specify any prepayment fees. This will protect you in the event you wish to pay off your home equity loan earlier than the loan expiration date.

What is the Length of the Loan?

Home equity loans are available in varying loan terms, anywhere from 5-year, 10-year, 15-year, 20-year, to 25-years. The money is borrowed in one lump sum with set monthly payments for the length of the loan term.

Home equity lines of credit are typically opened for terms of 10 years to 15 years, although some loans also have a fixed time - a draw period - when you can withdraw money from the account. Find out both the loan term and the draw period, if there is a minimum withdrawal amount when you open the account, if withdrawals have a minimum or maximum amount, and how you gain access to your credit line (checks, credit cards, or both). Some home equity lines of credit can be renewed once the draw period expires, while others cannot. The outstanding balance on some home equity lines of credit are due in full at the end of the loan term, while other loans allow for repayment over a fixed time.