Mortgages & Refinancing

Home Equity

According to a recent article on cnn.com, It's increasingly a sucker's bet to buy more house than you can afford and assume that cheap financing and rising home equity will bail you out. Why? Housing affordability is the lowest it's been in 14 years.

In California, for example, only 14 percent of people can purchase a median-priced home. "This is an unbelievably dangerous time to take risks in the housing market," says financial planner Harold Evensky of Coral Gables, Fla. (a hot market itself ). "It's a great time to build up a good amount of equity in your home."  Be careful when considering using Home Equity for loans or lines of credit, it's always smart to make sure you aren't over-extended in case of a financial emergency, hot home market or not!

Home Equity Loan

Advantages of Home Equity Loans

Home equity loans are attractive to borrowers for a few main reasons:

• They typically have a lower interest rate
• They are easier to qualify for if you have bad credit
• Payments on a home equity loan may be tax deductible
• Borrowers can get relatively large loans with this type of loan

Common Home Equity Loan Uses

Borrowers use home equity loans for some of life’s larger expenses, because homes tend to have a lot of value to borrow against. For example, you find that a lot of borrowers want to

• Remodel or renovate the house
• Pay for a family member’s college education
• Finance the purchase of a second home
• Consolidate high-interest debts

Pitfalls of Home Equity Loans

Before using a home equity loan for any purpose, you should be aware of the pitfalls of these loans. The main thing is that you can lose your home if you fail to meet the payment schedule required by the loan.

Another common pitfall of home equity loans is that scammers have found plenty of ways to cheat homeowners out of their most valuable asset. Be sure that you know who you’re doing business with. If something smells fishy (like a high-pressure sales pitch or an inability to put things in writing), then take a step back and make sure the deal is legitimate.

Home Equity Loan - Not Always The Best Option

We've posted many articles detailing the ins and outs of the Home Equity Loan.  This is simply a reminder that the Home Equity Loan is not always a good idea.  Here are a few reasons you will want to really think through your decision before taking out a Home Equity Loan:

• If you default, you could lose your home, probably your biggest asset.

• Home Equity Loans can be a risky spending tool for younger homeowners who are not established in their  careers and have less experience owning a home and managing money.
• The loans can be risky for older homeowners who would be tapping their nest egg close to retirement.
• Credit lines have variable interest rates, so monthly payments can rise, even if your income doesn't.
• If your home's value drops, you can end up owing more than the house is worth, putting you upside down -- a bad situation if you need to sell the house.
• Using an equity loan to pay off debt may make monthly payments cheaper but could cost you more in the long haul, because you're taking much more time to pay off the debt.
• You may not be able to lease your home during the term of your loan.

Home Equity Loan

Pros of taking out home equity debt

• In most cases, borrowers can deduct the interest on loans up to $100,000 on their taxes.
• The loans carry lower interest rates than credit cards and unsecured personal loans.
• They can be used for lots of things: debt consolidation, home improvements, tuition, medical costs, emergencies and big-ticket items.

Cons of taking out home equity debt

• If you default, you could lose your home, your biggest asset.
• Such loans can be a risky spending tool for younger homeowners who are not established in their careers and have less experience owning a home and managing money.
• The loans can be risky for older homeowners who would be tapping their nest egg close to retirement.
• Credit lines have variable interest rates, so monthly payments can rise, even if your income doesn't. If your home's value drops, you can end up owing more than the house is worth -- a bad situation if you need to sell the house.
• Using an equity loan to pay off debt may make monthly payments cheaper but could cost you more in the long haul, because you're taking much more time to pay off the debt.
• You may not be able to lease your home during the term of your loan.

Time Magazine HELOC article

Time.com has a good article regarding HELOC:
With college-acceptance letters in the mail, hefty bills are sure to follow. If you're tempted to tap your home equity to help cover the tab, conditions are favorable. Real estate values are high, and interest rates low. Those not subject to the alternative minimum tax may also get a tax benefit. Here's a guide to the options. --By Ellen McGirt

 
HOME-EQUITY LINE OF CREDIT, (HELOC)

HELOCs let you tap the equity in your home as cash. You use checks or credit cards linked to the HELOC to draw on the money as needed. The average interest rate nationwide is 5.95%, but the debt on HELOCs is variable, meaning the rate you pay can go up over time. While the repayment period on HELOCs can vary from five to 20 years, these loans are better for those who expect to pay everything back within a few years, limiting the risk of rising rates. Note: because HELOCs are considered revolving credit, if you max out your line, it will affect your credit score.

HOME-EQUITY LOAN

These loans give you a lump sum of cash at a fixed rate (current average: 7%), with low or no closing costs and a typical term of five to 15 years to repay. That simplicity and predictability is valuable. There are hidden costs, however. If you borrow enough to cover four years of tuition, you'll need to reinvest whatever you don't use right away. And even so, you may not offset the interest you're paying for money you don't need yet.

CASH-OUT REFINANCE

If you take out a new mortgage for more than the outstanding balance of the old one, the difference is returned to you as cash. Because the financing vehicle is a mortgage, you have a wide range of options: 30-year fixed (current average: 6%), 15-year fixed (5.6%) or adjustable (5.4% for a five-year adjustable). This is the perfect option if your existing mortgage carries above-market rates and you're not close to paying the loan off. Extending the life of a mortgage can add thousands in extra interest over the years. Also, refinancing generally adds about $2,000 in closing costs, and you'll still have to worry about reinvesting any unused proceeds.

Home Equity Loan

Using the roof over one's head as collateral for sizable amounts of credit has become an extremely popular and efficient way to borrow. Equity is the difference between your home's appraised -- or fair market -- value and your outstanding mortgage balance. If you have equity in your home, borrowing against it might be a very effective way to get some things you need at a good price.

The articles found within this site and through the links to our partners are terrific resources on Home Equity Loans.

Home Equity Loan Deductions

About home equity loan deductions
Not all interest can be written off

Low mortgage interest rates made 2004 another big year for refinancing, and home-equity borrowing in the United States reached a record high last year, according to a recent study.

Americans took out $431.3 billion in home equity loans and lines of credit, according to SMR Research, a market research firm in New Jersey. That's up 35 percent from 2003.

Yet many borrowers don't realize they might not be able to deduct all the interest they pay on home equity loans. That would depend on how much they borrowed and what they used the money for. Taxpayers subject to the Alternative Minimum Tax face stricter limitations on what they can deduct.

First, it's important to know that in "tax-speak" there are two kinds of mortgage debt: home acquisition debt and home equity debt.

Acquisition debt is a mortgage or mortgages you take out "to buy, build or substantially improve" your main or second home.

In general, you may deduct the interest you pay on up to $1 million in home acquisition debt. The limit applies even if you own a second home.
see full article at http://www.sunherald.com/mld/thesunherald/business/10929982.htm

Tax Advantages from Home Equity & Refi

Refi points
While points-deductibility is a tax-saving option buyers should explore any time they get a loan to buy another home, a taxpayer who simply refinances also might be eligible for this tax break.

In most refinancing cases, a homeowner must deduct any loan points over the life of the loan. But if part of the refinanced mortgage proceeds are used to improve the main home and tests 1 through 6 listed above are met, the portion of points attributable to the improvement money can be deducted in the year paid. The same rules apply to home equity loans or home equity lines of credit.

If, however, you use the extra refi or home equity cash for something else, such as paying college costs or buying a car, you still can deduct the points but not completely on one tax return. The points deductions must be parceled out over the equity loan's term.

To figure the annual deduction amount, divide the total points paid by the number of payments to be made over the life of the loan. You should be able to get this information form your lender.

$49 Home Equity Loan

Ditech Launches $49 Home Equity Loan

ditech.com’s low rate Home Equity Loan with a Flat Fee of just $49 allows you to borrow up to 100% of your home’s equity. Use the home equity loan to consolidate debt or make home improvements and close your loan quickly and easily.

Other fees may apply - check ditech's site for more on the Home Equity Loan.

Interest on home equity loans not always deductible

Home Equity Loan
SUE McALLISTER
San Jose Mercury News

Low mortgage interest rates made 2004 another big year for refinancing, and home-equity borrowing in the United States reached a record-high level last year, according to a recent study.

Americans took out $431.3 billion of home equity loans and lines of credit, according to SMR Research, a market research firm in New Jersey. That’s up 35 percent from 2003.

Yet many borrowers don’t realize they might not be able to deduct all the interest they pay on home equity loans. That would depend on how much they borrowed and what they used the money for. Taxpayers subject to the Alternative Minimum Tax face stricter limitations on what they can deduct.

First, it’s important to know that in "tax-speak" there are two kinds of mortgage debt: home acquisition debt and home equity debt.

Acquisition debt is a mortgage or mortgages you take out "to buy, build or substantially improve" your main or second home.

In general, you may deduct the interest you pay on up to $1 million in home acquisition debt. The limit applies even if you own a second home.

So let’s say you took out a home equity loan, and you used it to remodel your kitchen for $40,000. For tax purposes, that amount is considered part of your "acquisition" debt because it was used to improve the home. You can deduct the interest on that new debt, as long as your total acquisition debt is $1 million or less.

From the Internal Revenue Service’s standpoint, home equity debt is different.

It is money you borrowed from your equity and used for purposes other than buying, building or improving your home. Only interest paid on $100,000 of equity debt is deductible as mortgage interest. Again, the limit applies even if you own a second home.

If you used a home equity loan to pay your child’s college tuition, for example, you can deduct only the interest you paid on the first $100,000. (Unless you are subject to the Alternative Minimum Tax; more on that in a moment.)

If you borrowed more than $100,000 and used it for purposes other than improving your home, you may still be able to deduct the interest if you used the money to invest in stocks or start a business, though it won’t count as mortgage interest paid. But if you spent the money on a vacation or a car, the interest is probably not deductible.

Things are trickier still for those who must pay the Alternative Minimum Tax, the tax that mainly targets higher-income taxpayers.

Those subject to AMT don’t get many of the write-offs that other taxpayers do. Only interest on mortgage debt that is used to buy, build or improve a home can be deducted by those subject to AMT.

That means that if someone who pays the AMT spends $20,000 of her home equity loan on a car, the interest on that debt is not deductible, even if she has not exceeded the $100,000 equity debt ceiling.

"None of the equity debt is allowed for AMT, and that’s where people are getting burned," said Claudia Hill, owner of Tax Mam Tax Services.

For example, let’s say you had a mortgage for $300,000, and you’ve paid it down to a balance of $280,000. You refinance that amount of acquisition debt, and also take out a $100,000 equity line of credit. You use $60,000 to remodel a kitchen and bathroom.

Now you have $340,000 worth of acquisition debt ($280,000 plus $60,000), the interest on which is deductible for both regular and AMT purposes.

If the remaining $40,000 of the home equity loan is used for something other than substantial improvement to the home, it is deductible for regular taxpayers, but not for AMT payers.

For more information, refer to IRS Publication 936, "Home Mortgage Interest Deduction," or consult a tax adviser.