Thanks to the fact that Uncle Sam encourages home ownership - and makes his point at tax time - there are very real benefits available to those who use their home equity when borrowing money.

There are two major advantages in using your ability to get a home equity loan: tax deductibility of interest and a lower interest rate.

Here's how they work:

Better Rates and Debt Consolidation

• Many homeowners consistently carry thousands of dollars a month in high-interest credit card debt, without putting to use one of the most effective financial aids at their disposal�a home equity loan for debt consolidation.
• The average interest rate you'll pay for a home equity loan can be 7% to 10% less than the rates you're paying for your credit cards, or other personal loans. Why pay the credit card companies those exorbitant rates when you have an alternative at your fingertips? You're living in it!
• Plus, the interest on a home equity loan is tax deductible, generally up to the first $100,000 borrowed.
• Credit card or other personal loan interest, on the other hand, is generally NOT tax deductible.
• So, if you're carrying a lot of high-rate credit card or other debt, it makes good financial sense to pay them off with a home equity loan; get a lower interest rate on the consolidated debt; AND, be able to deduct the interest from your federal taxes.

Home Improvements for Resale Value and Tax Relief

• Another example of a fiscally smart use of home equity loan funds is for making home improvements that increase the value of your home.
• Reinvesting in what may be your single biggest asset is one of the most risk-free and sound forms of investment you can make. Putting your own equity to work to make it possible is even smarter.
• To maximize re-sale value, consider upgrades that improve energy efficiency, reduce maintenance costs, modernize kitchens or baths, or increase curb appeal.
• Making upgrades that qualify as 'capital improvements' will also improve your 'basis' and reduce your capital gains taxes when you sell.

No Restrictions, But . . .

• Technically, there are no restrictions on how you choose to spend home equity loan funds, but it's most wise to invest the borrowed money into something that enhances your financial situation, or creates an asset.

Taking advantage of the embedded power of your home equity obviously can improve your financial picture, as well as provide re-investment opportunities that lead to significant tax relief when you sell.

There two fundamental types of home equity loans - which you'll want to explore next.

What Are the Different Types of Equity Loans?

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