A home equity loan is a loan secured by the equity in your house or apartment.

You can either take the proceeds as cash or use the loan as a line of credit to borrow money if and when you need it. 

A particularly advantageous type of loan for a person with increased expenes due to a medical condition is one which only requires payment of interest for a period of time, with an interest rate after that period of time locked in.

To learn what you need to know about home equity loans, see be.ow..

CAUTION:

• If you take out a home-equity loan and are unable to make the required repayments, you could lose your home. This could be particularly problematic if the loan has a variable interest rate and the interest rate rises to the extent that you cannot make monthly payments.
• Read the below section about avoid fraud. For instance, be wary of shady brokers and "too good to be true" offers.

For information, see:

• What Are Home Equity Loans and Lines of Credit?  
• How Do I Qualify For A Home Equity Loan Or Line Of Credit?
  
• How To Avoid Fraud When Seeking A Home Equity Loan Or Line Of Credit  
  
• Taxes And Home Equity Loans  
  
• Is A Home Equity Loan Right For Me? 
  
• Tips To Consider If You Do Take A Home-Equity Loan Or Credit Line
  
• What To Do If You Can't Afford The Payments On A Home Equity Loan 
  

A home equity loan is a loan secured by the equity in a house or apartment you already own. The equity is the difference between what you already owe on the house and the amount you could get for it if you sold it. For example, if your house is worth $150,000 and you owe $70,000, the equity if $80,000 ($150,000 minus $70,000 = $80,000).

You can get the loan as a lump sum (all in cash now, which is called a Home Equity Loan), a line of credit (where you take the money as you need it, called as expected, a Line of Credit), or a combination of the two.

The process can usually be completed quickly, and there are no restrictions on how you use the cash or credit you receive. You may even be able to get a home equity loan or line of credit without any closing costs.

Home equity loans are often used to replace high-interest rate debt, such as credit cards debt, with lower-rates. This can lower your total monthly expenses, since the home-equity loan payments may be lower than those of the debt you're replacing.

While the amount available is traditionally a percentage of the equity in your home, some loan programs now allow you to borrow as much as 25% more than your home is worth.

Watch out for the sales techniques of agents who try to get you to borrow more than your home equity. Despite what they might say, interest on amounts over and above your home equity is not deductible. Also, these loans tend to have higher interest rates and closing costs than a traditional home equity loan. Plus, if you sell your home, you may not get enough to pay off your debt -- which you and your estate will still owe.

It's sometimes possible to add the value of personal property to the value of your house when borrowing against it, allowing you to borrow more.

As with a mortgage, lenders will review your credit, income, and the value of your house to decide whether to give you a loan, and, if so, in what amount.  Lenders cannot consider your health -- even when the income you receive is due to your health, such as from a Disability Income Insurance Policy or Social Security Disability Income (SSDI).

NOTE: According to John Ulzheimer, president of consumer education at SmartCredit.com: Insurance and utility payments, rent and other regular payments can help increase the likelihood that you can get a loan. Under the Equal Credit Opportunity Act, lenders are required to conisder these credit references if the consumer asks them to.  Give proof of payment to lenderws and tell them you want these payments considered as credit references under Regulation B of the Equal Credit Opportunity Act. There are statutory penalties if the lender violates the law.

To avoid Home Equity Lending Fraud

• Don’t give out personal information or agree to a loan over the phone or via the Internet.
• Don’t let anyone who may be working on your home, like a contractor, steer you to a particular lender.
• Don’t borrow more than you can afford. Educate yourself.  Know what the prevailing interest rates are. Remember that a low monthly payment isn't always a deal. Look at the TOTAL cost of the loan.
• Learn the real value of your home by getting an independent appraisal.
• Don't trust ads promising "No Credit? No Problem!" If it sounds too good to be true, it probably is.
• Get your credit report and your credit score. See if you qualify for better rates than are being offered.
• Never lie about your income, expenses or available cash to get a loan and avoid any broker or lender that encourages you to do so.
• Avoid early repayment penalties and fees of more than 3% of the loan amount (4% for FHA or VA loans).
• Be aware that credit insurance premiums (insurance that a borrower pays a lender) should never be financed into the loan up-front in a lump-sum payment.
• Don’t ever sign a document that has blank spaces or pages in it that the lender promises to fill out later.
• Ignore high-pressure sales tactics.  Take your time and read everything thoroughly.
• Be wary of a lender that promises to refinance the loan to a better rate in the future.  A predatory lender will let you keep refinancing a bad loan and will charge fees every time.
• Know that even if you have already signed the agreement you have three days to cancel it.
• Take your documents to a housing counselor near you and have them review the documents or refer you to someone who will.  To find a counselor near you, visit the Department of Housing & Urban Development at www.hud.gov/offices/hsg/sfh/hcc/hcc_home.cfm  or call 800. 569.4287.  

There is a great advantage of using a home-equity loan to pay off personal debt: you replace higher interest payments that are not tax-deductible with lower ones that are tax-deductible. 

The interest on home equity loans of up to $100,000 or the equity in your house, whichever is lower, is tax-deductible. For example, if you take out a home equity loan of $65,000 and have $50,000 of equity in your home, the interest on only $50,000 of the home will be deductible.  If you take out a home equity loan of $125,000 on $125,000 equity, only the interest on $100,000 of the loan will be deductible. If you use the money for home improvements, the limit rises to $1 million in total mortgage debt.

The cash that you receive from a home equity loan or line of credit is not taxable because it is considered a loan.

Consider the issues mentioned above before deciding to take out a home-equity loan. You could be increasing your monthly payments if you don't use the money to pay off other debt. Make sure you can afford this. If you can't, you could lose your house.

Complete your budget to see how your finances would look if you were to take out a home-equity loan.

If you decide to borrow against the equity in your home:

• Find out if you can get credit life insurance on the debt.  If you can, you will increase the value of your estate by the amount of the life insurance.
• Decide whether you want the cash now or just want to have it available as a line of credit for whenever needed.  If you don't need all the money now, or only need it for certain regular expenses (such as annual property taxes), or because of potential future health expenses, credit lines may be better. They will save you money since you don't start paying interest until you actually borrow each chunk of money.
• Minimize fees:
  • If you only want a standby credit line, look for a loan that doesn't charge closing costs or other up-front fees. 
  • Borrow only the amount you need.
  • Avoid lenders who impose annual maintenance fees. 
  • As with a first or second mortgage, consider both the fees and interest rates when choosing a lender.  Sometimes a lower rate can be more expensive if it comes with higher fees.
  • Watch out for other fees, including:
    • Prepayment penalties.
    • Closing costs.
    • Lifetime rate caps: If the interest rate on the home-equity loan is variable, make sure you could afford the payments that would result from the highest interest rate you can be charged.
    • Inactivity fees:  Make sure there's not a fee if you don't use a credit line for a certain period of time, such as a year.
• Comparison shop for the lowest rates and fees.  In addition to your local banks, check out what is available on the internet such as www.bankrate.com and www.eloan.com . If you can find one, it is particularly advantageous for a person with higher expenses due to medical expenses to take out a loan which only requires payment of interest and not principal for a period of time. This is particularly the case if when the repayment changes to contain both interest and principal (the amount you borrowed), the interest rate is fixed. (If interest at that point is lower, you can likely refinance. It is higher, you are protected because your rate is locked in.)

If you cannot afford to make the monthly payment son  your home equity loan for any reason, speak with the lender(s) of both your mortgage and home equity loan about combining both loans into a new primary mortgage to lower overall costs.

If neither lender is willing to make the change, or to do so at a reasonable rate/amount, contact a mortgage broker to see what he or she can do to help.

When you calculate what you can save, include the costs associated with the refinance.

To learn more about mortgage refinancing, click here.