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Why HELOC Spells Good News for Homeowners and the Economy

And although mortgage rates are at 50-year lows, with the average 30-year fixed-rate loan going for 3.4%, installment loan rates are comparatively pricey. According to the BankingMyWay.com survey, The three-year installment loan averages about 5.5%, the 15-year deal nearly 6.7%.

Like mortgages, the installment loans were crushed in the credit crunch. Fewer homeowners qualified because of financial setbacks such as lost jobs, and many "underwater" homeowners, owing more on their mortgages than their homes were worth, had no equity to support a home equity loan. Also, in a default, the home equity lender is second in line behind the mortgage lender, making it very difficult for the lender to recover what is owned in a foreclosure. Lenders therefore became very conservative about home equity loans.

While more homeowners are getting installment loans now, the comparatively high interest rates are an issue. Anyone wishing to borrow a large sum might do better with a cash-out refinancing, getting a new mortgage larger than the balance on the old one, and benefiting from today's low mortgage rates. An installment loan might be preferable to a mortgage if the loan will be relatively small, because the fees are likely to be much lower.

Similarly, one borrowing for a new-vehicle purchase might do better with an auto loan, as they are averaging 4% to 4.5% with dealers occasionally going even lower. Keep in mind, though, that for most taxpayers the interest on home equity loans is tax deductible, while interest on auto loans is not.

For most people, home-equity loans are cheaper than credit card debt, which, like car loans, is not tax deductible. But the homeowner looking for a financial safety net should also look into a HELOC. Many of those start about 3%, though they might charge 5% to 6% after the first few months, depending on the borrower's credit rating.

That's a lot cheaper than a credit card, and there typically is little or no start-up fee with a HELOC. But because there's no telling how high the rate could go in the future, the HELOC is best for borrowers who will be able to pay off their balances fairly soon.
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