Home Equity Loan - Case Studies
Ramifications of accepting
a loan offer.
Milton is thinking of accepting a loan offer. How will this affect
future selling, future home equity borrowing and what will be the
tax implications?
Analysis: With any second mortgage product, (a home equity
loan or a home equity line of credit), you generally must pay off
the loan in full if you sell your home.
With regards to future borrowing: lenders have typically allowed
the combined value of your first mortgage and your home equity loan
to be 80% of the home's value. If Milton's combined value of first
and second mortgage has exceeded 80%, some lenders will not allow
him to further borrow against his home equity. It should be noted
that some lenders do allow a higher loan-to-value of 90% and some
lenders go as high as a loan-to-value of 125%.
Milton should consult a tax advisor for the specific benefits available
to him but generally... he can reduce his taxable income by the
interest paid on the first $100,000 he borrows regardless of the
way the money is used. If a home equity loan is used for home improvements
or to buy another home, interest paid on the first $1 million borrowed
can be deducted. When you exceed 100% loan-to-value, the portion
of your home equity loan in excess of your home's value is not tax
deductible unless it is used for home improvements or to buy another
home.
More Related Information On...
borrowing affected by loan-to-value - see How
much can I borrow?
tax benefits - see Advantages
& disadvantages of a home equity loan, Uses
of a home equity loan
More Case Studies:
- Using home
equity for debt consolidation: Tony wants to use the
equity he has in his home for debt consolidation but he is unclear
about the advantages and disadvantages of doing this. If borrowing
from his equity is suitable for his situation, what type of loan
should he get?
- Using a
home equity loan for home improvements: Charlene and
Russell are considering borrowing from their home equity to make
home improvements. They have a rough estimate of costs and they
plan on doing the work over the next year. What type of loan is
right for them?
- Should
you use the equity in your home to buy a car? Christine
wants a new car but she has no savings. Should she use a home
equity loan to buy a new car?
- Cash-out
refinancing? John wants to borrow from the equity
he has in his home but he is not sure if he should get a home
equity loan or cash-out refinance?
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