Personal Insights

Should I Take out a Home Equity Loan?

The amount of equity you have in your home — the difference between its market value and the amount you owe your lender — can be used as collateral to borrow money in the form of a home equity loan.

“We’ve seen a slight increase in home values over the second quarter, which means many customers may have more equity available in their homes for loan purposes,” says Jennifer Valenti, Vice President, and Equity and Direct Product Manager, Consumer Lending, at Regions Bank.

Home equity loans can provide useful cash, but borrowing money almost always comes at a cost. Before you take out a home equity loan, make sure you’ll use the funds in a way that will work to your advantage.

Achieving Your Financial Goals with a Home Equity Loan

In general, it’s best to put your home equity loan funds toward an asset that will appreciate in value as a result. For example, you may want to consider a home equity loan to finance construction upgrades, such as a bathroom or kitchen remodel, if doing so will increase the value of your house (the equity created in addition to your original equity at least meets or exceeds the total cost of borrowing the funds, including interest and fees).

Considering Tax Implications of Home Equity Loans

Home equity loans may qualify as home equity debt and the home mortgage interest deduction. There is, however, a limit on the amount of debt that can be treated as home equity debt. For 2013 (2014 has not been released as of Dec. 1, 2014), the total home equity debt on your home was limited to the smaller of:

• $100,000 for individual filers and $50,000 if married filing jointly
• The total of your home’s fair market value reduced (but not below zero) by the amount of your home acquisition debt and grandfathered debt

Remember that if you take out a small loan, the associated fees may outweigh any tax advantages. And as always, you should consult your tax advisor regarding the deductibility of interest and charges.

Decreasing Debt Through a Home Equity Loan

Using a home equity loan to consolidate debt can be a risky strategy. You may be able to get credit at a lower interest rate, but putting additional debt on your home can lead to problems down the road. Falling behind on home equity loan payments could lead to the loss of your home. Plus, for federal student loan debt, you would be giving up repayment options and forgiveness benefits.

To learn more about using a home equity loan to consolidate debt, use the Regions Home Equity Loan Calculator and visit our Home Equity page.

With the right amount of proactive planning, a home equity loan can help you realize your dreams and meet your financial goals.