Should you borrow against home equity?

Borrowing against the equity you’ve built up in your home can be a really good deal for many consumers. Sometimes known as a second mortgage, a home–equity loan allows homeowners to borrow funds based on the amount of principal they’ve paid against your property. You can see how much equity you have in your home by calling your mortgage company or your end-of-the-year mortgage statement.

A home-equity loan can be set up either as a loan or a line of credit you can use when you need it. Most lenders allow you to borrow up to 80 percent of your equity. Second mortgages generally have much better interest rates than personal loans or credit cards. But one of the biggest incentives for borrowing against your equity is that, just like with your mortgage, the interest is tax deductible up to $100,000.

A second mortgage has its risks, however. Most borrowers must pay closing costs, points or other fees. If you decide to sell your home, you'll have to repay the outstanding balance, probably in a lump sum, which could limit the amount you could finance for a new home, The biggest risk, however, is that is disaster strikes and you can’t make your payments, you could lose your home,

Home-equity loans generally allow you to borrow money at a fixed interest rate. The total amount you borrow is advanced to you when you sign for the loan. You'll repay the loan with equal monthly payments over a fixed term.

You should consider a home-equity loan if you want to pay off large credit-card debt, medical bills or any other major expense. Be sure you weigh all of the risks. Also develop some sort of backup plan to make sure you can make the payments so that you don’t endanger your home in case you lose income.