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 your payments.
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.
Return from Home Equity Loan to Types of Home Loans