Worthwhile Purpose

• Once a requirement for U.S. credit unions, making loans only for worthwhile purposes remains a component of some lender policies. Every home equity loan application requires you to state your purpose for requesting the financing. While still potentially important when requesting an unsecured loan, your stated purpose for borrowing when offering your home as collateral is less critical. Most lenders want you to state a worthwhile purpose, such as home improvements, education, or bill consolidation, but they seldom impose real restrictions.
  
  

Tax Considerations

• When home equity loans and home equity lines of credit (HELOCs) became popular, the purpose and use of loan proceeds mattered a great deal for tax issues. For example, a purpose of making home improvements permitted your interest cost to be tax deductible, but a purpose of buying a luxury automobile rendered your loan interest non-deductible. IRS rules changed, as they have a habit of doing, and "numbers" are now more important. Your equity loan interest, up to a $100,000 loan balance, is usually tax deductible, regardless of purpose or use. But always check with a tax adviser to confirm deductible issues.
  
  

Lender Concerns

• Whether they admit it or not, lenders are always concerned with your purpose for a loan, home equity or otherwise. Stating that your purpose is to travel to Las Vegas to win your fortune at the gambling tables is never a good idea. Conversely, if your purpose is to make major home improvements, your lender will be most happy. Using home equity loans to improve your home -- your lender's collateral -- is always the best reason to borrow. This is particularly important when your loan-to-value is high -- at or above 80 percent of your home's value. Making improvements should increase your home's value, generating more security for the lender.
  
  

Purpose Matters to Homeowners

• The purpose for a home equity loan should matter to you, the homeowner. For example, many experts reject debt consolidation as a good purpose for a home equity loan. While you can reduce your interest rate when consolidating high-cost credit cards, you would now offer important collateral -- your home -- when you formerly risked none of your assets. However, should you use your loan to make important improvements to your home, your purpose not only matters, but increases your home's value.