Home-equity loans vs. mortgage loans


Q: My house is paid for, but I have credit card bills that amount to $10,000. I want to consolidate them by borrowing, but the only collateral I have is my home.

A: What kind of loan is best to get, a home-equity loan or a mortgage loan? Which loan is tax-deductible? Does a lien go on the property with both loans?

Almost any kind of mortgage loan would be better than credit card debit. The interest rate will most likely be lower and tax-deductible, as long as a lien is imposed on the property. Since both home-equity loans and regular mortgages require a lien, the interest will be tax-deductible -- provided you itemize expenses on your tax return.

Which loan is better is a much more complex question. Home-equity loans are generally structured as open-ended lines of credit, meaning that you can borrow any amount up to the approved limit and pay back as little or as much as you want each month. However, in most cases, these loans must be paid up within a specified period of time, such as five, seven or 10 years.

Currently, many home-equity loans charge variable rates, usually percent to 3 percent over prime (now at 9 percent), although a growing number of mortgage lenders offer fixed-rate options as well.

In most cases, the up-front costs on home-equity loans are much lower than those on a regular mortgage, and many lenders don't charge points or other closing costs. However, policies do vary.

A fixed-rate loan will lock in your interest rates for the future, which can be great if interest rates go up. The rates themselves vary. For example, three-year rates are at 7.50 percent; five-year rates are at 8 percent; 10-year rates about 8.50 percent; and 15-year rates are at 9 percent to 9.25 percent. If you think you can pay off this obligation in three to five years, it is best to get one of those two lower rates.

A third alternative is a variable-rate mortgage, which today offers the lowest interest rate -- as low as 6 percent to 7 percent. The up-front costs are generally identical to the fixed-rate mortgage. So what's the catch? A variable mortgage provides little protection against future rate increases. If rates go back up to the 11 percent and 12 percent range or higher, this mortgage could become an expensive proposition.

I suggest you call four or five local banks or thrift institutions and ask for their current rates for no-cost mortgage or home-equity loans. Compare and apply for the best deal.

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