Home Equity Loan
A home equity loan, sometimes also called home equity lines of credit, is a
second mortgage that allows you to access the equity in your home. Equity is the
difference between the market value of your home and the outstanding mortgage
amount. So if the market value of your house was $300,000 and the outstanding
mortgage was $79,000 then your home equity would be $221,000. If you want to
access the equity in your home, you can take out a home equity loan.
You can borrow as much money as you need as long as you don't exceed the maximum
loan amount you agreed with your lender. The money can be used for whatever
purpose you desire such as unexpected medical bills or the purchase of a new
car. They can also be used to consolidate consumer debt, and are thus called
debt consolidation loans. However, consumer debt by itself is unsecured debt, so
you won't lose your property if you can't pay it off. In contrast a home equity
loan is secured debt, which means that you can lose you home if you default on
Since a home equity loan is a second mortgage, they will have a higher interest
rate than first mortgages. You are most likely to get a relatively good interest
rate on a home equity loan if your borrowing amount does not exceed 80% of your
home's market value. For example let's say the market value of your home is
$200,000 and you have $81,000 outstanding on your first mortgage. Then your best
interest rate will likely be from limiting the borrowing amount to $79,000
($200,000 x 80% less $81,000 first mortgage).
A home equity loan's interest is classified as mortgage interest; this is in
contrast to student loans, car loans, and credit card debts which are considered
consumer debt. The distinction is important because consumer debt is not tax
deductible, whereas for the most part mortgage debt is tax deductible. Your home
equity loan interest might be deductible for state and federal income tax. How
much interest may be deductible is determined by two main checks:
Up to $100,000 of your home equity loan interest is tax deductible. Any interest
over the $100,000 is considered consumer debt, which is not tax deductible.
The Market Value Check
The deductible indebtedness can not exceed the market
value of your home. Anything over this is not tax deductible.
A home equity loan
can help you pay off certain expenses, finance additions to your home, or even to
consolidate debt. However, it is important to keep in mind that the home equity
loan is a second mortgage, meaning it will have a higher interest rate, and if
you default on your payments there is a risk of loosing your home.
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