HOME Equity Loan Information - A Consumer Guide To Home Equity

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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