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Home equity loans or using the roof over one's head as collateral for sizable amounts of credit has become an extremely popular and efficient way to borrow. Home Equity is the difference between your home's appraised -- or fair market -- value and your outstanding mortgage balance. If you have any home equity, borrowing against it might be a very effective way to get some things you need at a good price.
Home equity borrowing has recently became very popular among homeowners.
A couple of reasons for this exist: lower rates of interest and tax deductibility.
In 1986, tax changes went into effect that would eliminate deductions for most consumer purchases. Home equity loans became an attractive alternative that would allow you to buy goods and still get a tax deduction.
Let's say you bought your home for $95,000 and made a 20 percent down payment of $19,000. You then took a first mortgage to pay the remaining $76,000. On the day you closed on your home, you automatically had 20 percent
home equity. You gain equity as you pay off the principal and your home grows in value.
Let's say you've paid $12,000 toward the principal and your property -- valued at $95,000 when you bought it -- is now worth $115,000. Your beginning equity ($19,000), plus the principal you have paid ($12,000) and the increase in your property value ($20,000) gives you $51,000 in equity.
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