Home equity loans and line of credit provide homeowners with the ability to obtain a loan that can benefit from special tax treatment. The ability to obtain a home equity loan is dependent upon several factors such as: credit history, salary, debt and amount of equity a homeowner has in their house.

Equity refers to the amount of money that the homeowner has already invested into their property. It is the difference between the market value and what they owe. For example, if a homeowner purchases a property for $200,000 and pays a 20% ($40,000) down payment, they would have 20% equity in their home. Along with the previously mentioned variables, the amount of equity determines the amount of money available for loan.

The primary reason a home equity loan is so beneficial derives from its tax treatment. Home equity loans allow homeowners to deduct all or part of the interest they pay on the loan. Obviously, home owners who have significant non deductible debt, such as high rate credit card debt, would benefit greatly from a tax-deductible loan.

It is important to note that a home equity loan or line of credit is secured by using your home as collateral. This means that the loan is secured by your home. In other words, failure to pay your loan could result in losing your home. Obviously the decision to borrow against your home should not be taken lightly. While it can be a low cost source of funds, it is important for potential borrowers to perform their due diligence prior to using their home as collateral.