Consolidating mortgage home equity loan

Home equity loans exploded in popularity after the Tax Reform Act of 1986, as they provided a way for consumers to get around one of its main provisions—the elimination of deductions for the interest on most consumer purchases.

The Act left in place one big exception: interest in the service of residence-based debt.

The interest rate on a home equity loan—although higher than that of a first mortgage—is much lower than that on credit cards and other consumer loans.Be aware that home-equity loans can carry risks, too.The main problem with home-equity loans is that they can seem an all-too-easy solution for a borrower who may have fallen into a perpetual cycle of spending, borrowing, spending, and sinking deeper into debt.The loan amount is based on the difference between the home's current market value and the homeowner's mortgage balance due. Your equity in the home serves as collateral for the lender.The amount a homeowner is allowed to borrow will be partially based on a combined loan-to-value (CLTV) ratio of 80% to 90% of the home’s appraised value.

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