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Now that you own your home, and especially if you’ve paid some of your loan down, there are some ways you can use your home equity to go to work for you. The big difference is that your home acts as collateral when the lending institution considers whether or not to offer you a loan. Because you have that collateral, most equity loans and lines of credit are at much lower interest rates than what you may pay on a credit card or other unsecured loan. As with any type of loan, only borrow when necessary and make sure you really understand the payment terms and interest rates before you sign.

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Know How Much Equity You Have

In the simplest terms, your home equity is the difference between your home’s market value and how much you still own on your mortgage. So, if your home is worth $400,000 and you still ow $200,000 on your mortgage, then you have $200,000 in equity. Depending on real estate values where you live, this may be a great advantage to you as you consider your financial future.

Types of Home Equity Loans

There are two different types of loans that allow you to borrow against your home equity. Depending on your needs, you’ll want to make sure to select the loan that is right for you. The first is the home equity loan, which is a fairly standard loan in which you borrow one lump sum and then pay it back with a fixed interest rate over a period of time. The second is called a HELOC (home equity line of credit) which is like using your home equity for a credit card. You get a specific amount of credit over a period of time with an interest rate that adjusts with the market. If you need a lump sum all at once, opt for the equity loan; however, if you need smaller amounts over a longer period of time, a HELOC may be best for you.

Use Equity to Pay Debt

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It may or may not be a good plan for you to use a home equity loan to pay off credit card debt — it all depends on the interest rate you have on your credit card debt and what you get for your home equity loan. If you have high interest rate credit cards then, chances are, your home equity credit can help you get rid of that debt faster and with a lower interest rate. Just be sure you don’t start charging those cards up again once you’ve paid them off.

Tax Time

In many cases, you can deduct the interest on your home equity loans, up to $100,000 of debt, depending on your file status. By deducting that interest, you can get some money back from Uncle Sam when tax time rolls around, which may allow you to borrow even more. Be sure, of course, to check with your tax accountant before you start borrowing a lot of money against your home, but you may be surprised at how helpful your home equity line of credit or loan can be.

Be Smart About What You Borrow

Just because you’ve got some equity built up in your home, that doesn’t mean you should take it all out for your next vacation. Keep in mind that if you are unable to pay back a home equity line of credit or loan then you’re putting your home at risk, so it’s crucial that you only borrow if it can help your financial situation. You should never use this type of loan for gifts, vacations or anything else other than reducing debt.

Deborah Flomberg is a theater professional, freelance writer and Denver native. Her work can be found at Examiner.com.

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