The home equity loan came of age in 1996 when changes in the tax law eliminated deductions for the interest on most consumer purchases. Interest paid on home equity loans, however, remained exempt, up to $100,000 for taxpayers filing jointly.
The two main types of home equity loans are fixed-rate loans and variable-rate lines of credit (called HELOCs). The terms for both range from five to 15 years. With fixed-rate loans, the monthly principal and interest stay the same. Adjustable-rate loans usually start at a lower interest ratemeaning a lower monthly paymentbut can climb to a predetermined cap based on market conditions.
Most banks and mortgage companies are happy to make home equity loans because the loan is secured by a tangible asset that can be seized and sold to satisfy the debt if necessary, which minimizes their risk. But the ease with which homeowners can cash out their equitysometimes up to 125% of the value of the homebrings with it certain pitfalls.
Reloading
Home equity loans are appealing to people who have fallen into a downward spiral of spending and borrowing. The cycle of getting a loan to pay off debt and free up credit...
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