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7 home equity rules to live by

Things may seem like they’re changing rapidly in the home equity loan market, but the basic rules for borrowing against the value of your home are still the same. In recent years, some people seem to have forgotten the basics, and they ended up with more debt than they could pay off. So we’re here to refresh everybody’s memory. Here are 7 home equity rules to live by:

1. Consider your options
A home equity loan may indeed be the best way for you to borrow, but you need to look at all the alternatives - and determine whether you can really afford it. Refinancing your first mortgage, for example, may make more financial sense. Get more expert guidance in the section Using your home equity.

2. Know the tax rules
One advantage of a home equity loan is that the interest you pay on it is generally tax-deductible. But there are, of course, exceptions to that rule. Consult a tax adviser to make sure you qualify for the deduction. Or go to the IRS FAQ page and decode the IRS rules yourself, Einstein.

3. Long-term debt + short-term expenses = disaster
Chances are you’ll be paying off that home equity loan for several years, so using it to fund purchases from which you’ll only benefit in the short-term – such as a fabulous one-week vacation or a trendy new wardrobe -- is asking for long-term financial trouble.

4. The flip side of rule #3
Tapping your home’s equity for projects that will add to the value of your home or to make investments that will increase in value can be a shrewd financial move. A home equity loan can also be a great tool for consolidating high-interest credit-card debt. Just be sure you’ve also got a plan to cut back your spending, so you don’t end up with bad debt again.

5. Don’t go above 80 percent
Home equity is one area where “giving it 110 percent” is not a good idea. It’s wise to keep your total home loan debt below 80 percent of your home’s value. That way, you won’t have to pay for private mortgage insurance. And, if you have to sell your house unexpectedly, you have a cushion to prevent you from owing more in mortgage debt than a buyer is willing to pay for your house.

6. Shop around
As with any loan, you should shop around for the home equity loan with the best interest rates and the lowest fees. You can start by requesting home equity loan offers through LendingTree.

7. Have a plan
Before you borrow any money, you should know how you’re going to pay it back. But that’s especially true when it comes to home equity loans. Think hard before you put your house and your credit record on the line.

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