Home Equity Loan

 

Home Equity Line versus Second Mortgage

	Home Equity Line	Second Mortgage
Tax Deductible	Yes	Yes
Annual Fee	Yes (some lenders may waive this)	No
Draw money when needed	Yes	No
Fixed Rate	No	Yes

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You have probably heard the term “home equity loan” in the past, but did you know what it really meant? It is simple, a home equity loan, also called a line of credit, allows you to borrow money while using your home and property as collateral.

If you sign for a home equity loan you are in all effect signing for a second mortgage. You will be turning your equity into cash money that you can use for pretty much anything you want. Many people use this money on things like their children’s education or home improvements.

One of the things that you need to understand before you get this line of credit is what collateral really is. The collateral in this case will be your property, you will put is up as a guarantee that you will not default on any of your loan payments. If you do not make your regular payments according to the schedule that you agreed to in the contract, then the lender has the right to seize your home and sell it off to recoup their loss.

Home equity loans generally have variable interest rates rather than fixed interest rates. This means that your monthly payments will change depending on monthly interest rates and on how much you have borrowed. Interest is only charged on the money that you owe.

The money received from these loans can be used towards anything you want. You can fix up your home, pay your bills or even get a new car. But it is worth noting that like with any loan this service is not free and it does come with it’s own set of fees. And just like any other contract you must be sure to read it carefully. Whatever you do, do not sign it until you understand it fully and completely.

The home equity loan for home improvement The home equity loan is most often used to make renovations, additions or improvements to the home. This type of home equity loan may be used for an owner-occupied home or a rental home as both regularly need to be updated. The home equity loan is used to increase the real estate value of the home through improvements. Oftentimes, the increase in real estate value is actually much higher than the cost of the home improvement loan, effectively creating a profit as a result of the use of the home equity loan. This is often done if the home owner is getting ready to sell the home, affording quick repayment of the home equity loan which translates to less money lost to interest. The home equity loan for refinancing In most cases, refinancing of the first mortgage is best completed through a mortgage program; however, there may be some cases in which it is preferable to use a home equity loan to repay a first mortgage, effectively refinancing the home. This is the case if there are conditions in the mortgage agreement which prevent standard refinancing of the home. This is also the case if the interest rate on the home equity loan is considerably less than that of the first mortgage and there are no or low penalties for early repayment of the first mortgage. The home equity loan for other purchases In some cases, people will use a home equity loan to make other large purchases unrelated to the home, such as a new car or a luxury boat. The home equity loan affords a relatively low interest rate on a large sum of cash. The drawback is that the home is used as equity, making it absolutely imperative that repayment of the home equity loan is completed on time and in full. Failure to make effective repayment of the home equity loan can result in repossession of the home which, in addition to the obvious problem of homelessness, is harmful to credit and makes future purchase of a home much more difficult. Precautions should always be taken to insure regular repayment of any home equity loan. This is especially true of the home equity loan is not being used to improve the real estate value of the home or otherwise make use of the home as equity. Home Equity Loan   The amount of money that you can borrow against a line of credit is determined by the lender. In determining the amount that each person can borrow the lending institution will look at your: - Income - Debts - Credit history - Financial obligations - Credit history - Ability to repay the loan You can access your secured line of credit in several different ways depending on the lending institution. Some of the ways that you can access your loan are: - Checks (this is the most common way to access your loan) - Visits to the branch to borrow directly (banks usually offer this service) - Cards (only some lenders offer this) - ATM (only some lenders offer this)

Tax impact IRS defines this in two ways:   If you have used your Home Equity Loan to do improvements on your home than: In most cases, you will be able to deduct all of your home mortgage interest. Whether it is all deductible depends on the date you took out the mortgage, the amount of the mortgage, and your use of its proceeds. You can use this figure to see if you home mortgage interest is fully deductible.   If you have used Home Equity Loan to pay off your bills, but not to improve your property than: The interest would be deducted on line 10, Form 1040, Schedule A (PDF), Itemized Deductions. The amount you can deduct as interest on home equity debt is subject to certain limitations.

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