October 2000
Home equity loans and lines of credit are becoming increasingly attractive to homeowners. But what's the difference between the two, and why is a home equity loan a better value than other types of credit?
Traditional home equity loans work just like first mortgages — you borrow a lump sum for a fixed period of time, usually 7 to 15 years. The annual interest rate can be fixed or variable.
Another option is a home equity line of credit. Instead of borrowing a fixed amount, you get a line of credit for a fixed amount of borrowing power. Your credit line, typically $5,000-$10,000 and up to $100,000-$250,000, remains available for your use for up to 10 years. During that period, you can borrow that money at any time without additional approval from the bank.
One caveat: No matter which home equity option you choose, the full amount borrowed must be paid when you sell your house.
For more information on home equity loans or lines of credit from Citibank, or to apply, go to www.myhomeequity.com
Interest payments such as credit card interest and auto loan interest are not tax deductible. The only interest that is deductible is mortgage. Home equity loans are a second mortgage, so the interest you pay on them is typically tax-deductible — up to $100,000. (Note: You should always consult your tax adviser on tax deductibility.)
Unlike an auto loan, you can use your home equity line of credit many different ways — purchase a new car, go on vacation, pay for college tuition or remodel your house.
When you take out a home equity loan or line of credit, you pledge your house as collateral. Most lenders will only loan you a percentage of the equity you have in your house. Equity is the amount of the house you actually own. For example, if your home is valued at $100,000 and you still owe $60,000 on your mortgage loan, your equity balance is $40,000.
