Home Equity Loans – second mortgage

David M Siegel asked:




One of the biggest advantages that home equity loans offer is the deductibility of the interest rate. However, many debtors don’t fully recognize the limitations that are set on these deductions and how proper allocation of such loans can qualify them for the deductions. There are two types of mortgage loan interests. The first one is the interest from home acquisition debt which is used to buy, build, or substantially improve a house. The second one is the home equity debt which is not used to buy or build a home. The intent and actual use of the loan dictates how the loan is treated for income tax purpose.

Debtors can deduct interest from home acquisition debt that is up to $1,000,000. However, they can only deduct interest from home equity debt that is up to $100,000. Borrowing $120,000 for debt consolidation will not allow the debtor to deduct the interest from the extra $20,000, unless the $20,000 is used to substantially improve a house.

Another limitation on the deduction of the interest rate can be seen when the value of the house drops. The interest rate can only be deducted from home equity debt that is not exceeding the owner’s equity in the house. Therefore, if a debtor owns a house worth $300,000 and $250,000 is secured with a home acquisition debt and a debtor borrows additional $50,000 through home equity debt, the interest from the $250,000 and $50,000 would be deductible. But if the value of the house drops to $270,000 the interest on the $250,000 home acquisition debt would still be deductible, however only the interest from $20,000 (270,000-250,000) of the home equity debt would be deductible.

Debtors also have to consider whether they fall under the alternative minimum tax or the itemized tax regime. Only the itemized tax regime will allow debtor to deduct the home equity loan interest. Keeping this in mind, the tax factor may not apply to a debtor at all, and in this case it might make more sense to use other types of loans, instead of putting your house as collateral.

Gilbert

Webmaster Home123 asked:


 

Home equity loans or lines of credit allows you to borrow money, using your home’s equity as collateral where equity is the difference between how much the home is worth and how much you owe on the mortgage. A home equity loan (or line of credit) is a second mortgage that lets you turn equity into cash, allowing you to spend it on home improvements, debt consolidation, college education or other expenses.

Advantages and Disadvantages of the home equity loans

Advantages: There are many other advantages of home equity loans. The loan payments on these loans are tax deductible. Home buyers can take bigger sum equity loans. These loans also carry a low rate of interest. But it’s best to heck the prevailing interest rates from many lenders and banks before you actually go in for a loan. It’s also important that the borrower check the credentials of the lenders before applying for a loan. They are many scam and con artists who can take away your home in lieu of giving you a home equity loan. The borrower also risks losing the home in case they default on the loan.

The two major advantages of borrowing with a home equity loan are lower interest rates and potential tax savings:

- The interest rate you will pay on the average home equity loan is generally lower than the interest rate you will pay on the average credit card or any other type of non-secured debt.

- For home equity loans, you can generally deduct the interest you pay. The interest you pay on credit cards and other types of personal loans is generally not tax-deductible.

Disadvantages:

Risk of losing home. If you can’t repay or refinance the loan, then you may be forced to sell or lose your home. Your home is the collateral for the loan. Being late or missing loan payments can trigger foreclosure within 60 to 90 days.

Rising interest rates. With a variable interest rate, most home loan rates change when the economy changes. This means your monthly payments can rise and fall. Be sure you know what the cap is on the loan’s interest rate. The cap sets how high your interest rate can increase each year as well as how much it can increase over the whole loan time period.

Fees. Lenders can charge a variety of fees including origination, application, and withdrawal fees. Be sure to ask about all possible fees.

The major disadvantage of a home equity loan is that you are using your house to get approved for the loan. For some people who have flawless credit this might not be a problem, because they can insure themselves that they will do whatever it takes to pay off their loan. However, instances have arisen where individuals have forgotten or were they are not financially able to pay for their loans. So at this point you’re wondering what happens if you cant pay your home equity loan? With all financial decisions come risk and the risk of losing your home wouldn’t be an option, especially if you have a family.

Home equity loans are best used for home improvements that will increase the value of your home. Some improvements, such as swimming pools, don’t usually increase the value upon resale. Others, such as additional bathrooms, living space, renovated or updated kitchens, etc., generally do increase the value of your home.

The bottom line is this: if your home is worth more than you owe on it, a home equity loan can be a great way to take advantage of this, but it can also get you into serious financial trouble, and should be used wisely. Why not use the equity in your home as part of your retirement fund instead of spending it on things that may not last?

Over the life of home loans – sometimes up to thirty years – your financial circumstances can change dramatically. Starting a family, changing jobs, children leaving home and many other factors can alter your financial circumstances over the term of the loan. A home loan that is right for you at the beginning has the potential to become the worse mistake you ever made.

Refinancing can be useful and financially rewarding but it can also carry risks. It takes time and costs money, so before you decide to change to another lender, ask yourself if it is really the right thing for you.

Are you happy with your existing lender? Have they been professional and helpful in all the dealings you’ve had with them? Are you happy with your existing loan? Is the interest rate comparable to other lenders? Could you use some extra features offered with other products?

Has your financial situation changed? Maybe you’ve started a new job or become unemployed.



JOEL