ReSET Blog
Blog · November 30, 2022 · AUTHOR: Stanley Bawalan

Home Equity Uses and Advantages: Frequently Asked Questions

A home equity loan or line of credit is a type of second mortgage that lets you borrow against the value of your home. It's often used to finance large projects, such as fixing up your house or buying a new car. But there are plenty of other uses for home equity. Here are some examples:

1. What is a home equity loan?

Home equity loans are the second mortgage that uses your home as collateral. They can be used for any purpose, such as:

  • building a new home or renovating an existing one

  • paying off credit card debt

  • financing college education expenses for you or your children

Home equity loans are typically fixed-rate loans with a fixed term. You may borrow up to 80% of the value of your home, but there is usually an origination fee of around 1%.

2. What is a home equity line of credit (HELOC)?

A home equity line of credit (HELOC) is a loan secured by your home. You can draw money from it and pay it back over time, just like you would with any other loan.

However, unlike a traditional mortgage, there are no set monthly payments. Instead, the amount you owe changes depending on how much money you take out each month. 

When you take out more in one month than another, less interest will accrue on that balance because more principal has been paid off already; when you take out less each month than last time, your outstanding balance increases and more interest accrues as a result (because there's more money left outstanding).

3. What are the tax benefits of a home equity loan?

The interest you pay on a home equity loan is tax-deductible. You can deduct the interest on the loan from your income taxes. This means that if you paid $5,000 in interest for the year, but your taxable income is only $50,000, then you'll only have to pay taxes on 50% of that amount. So it will cost you less overall than it would cost someone who had no home equity loan at all!

This makes these loans highly advantageous for many homeowners because they're able to use their home's value as collateral for a new loan with a lower interest rate. That means more money in their pockets every month and more savings over time than traditional loans would provide them with - which could potentially mean retiring early or paying off other debts faster without having taken out any additional debt!

4. Can I get a home equity loan on an investment property?

If you own an investment property, the answer is yes. In fact, you can get a home equity loan on any property that you live in as long as it has equity. However, it is important to note that not all lenders offer HELOCs for investment properties. If your lender does allow them, there are still some things you should know about them:

  • You may need to have paid off enough of the first mortgage so that they will approve your request for financing (you'll have to check with your lender).

  • You must use this money for personal use only—it cannot be used for business purposes or investments like stocks or bonds.

5. Can I deduct the interest on my second mortgage under the new tax bill?

If you have a second mortgage on your house, you may be able to deduct the interest on that loan as well. To qualify for the deduction, the loan must be used to buy, build or improve your home. Your primary mortgage is not considered a qualified home improvement loan and will not reduce your taxable income if it has been refinanced or paid off within the current calendar year or prior two years (Revenue Procedure 2018-28).

For example, if you took out an amount of $300,000 for a second mortgage in 2020 and used it to remodel your kitchen and bathrooms so they would meet ADA (Americans with Disabilities Act) requirements for accessibility by people who are disabled—and then paid off that loan by refinancing in 2021—you can claim an interest deduction on that second mortgage of up to $15,000 ($1/$60).

6. Is it better to take out a home equity loan or personal loan for my project?

If your goal is to borrow money for personal purposes, then a personal loan may be the best option. But if you need funds for any purpose, including home improvements, vacations, or college tuition payments (and can’t qualify for a credit card), then a home equity loan might be your only option.

Home equity loans come with lower interest rates than personal loans and can be used to finance almost anything. Some people use them to pay off high-interest credit cards or payday loans or make large purchases such as cars and boats. Others use them to start businesses or fund new ventures by providing seed capital (money invested in an enterprise before it has begun generating revenue).

7. What are some ways that I can use the funds from my HELOC or home equity loan?

You can use the funds from your HELOC or home equity loan to pay for a myriad of things. Here are just a few:

  • College tuition

  • Vacation

  • Home improvements, such as adding on an addition, remodeling your kitchen and/or bathroom, or upgrading to solar panels

  • Wedding expenses, such as catering and flowers

  • New car (if you’re planning on using this money toward buying a new vehicle)

  • New home (if you’re planning on using this money toward buying another property)

8. Can I qualify for both a home equity loan and refinance mortgage at the same time?

This is a question that many people have. And the answer is yes! You can qualify for both a home equity loan and refinance mortgage at the same time. This can be done for several reasons:

  • You may be able to use the funds from your HELOC to pay off your first mortgage.

  • The two loans could be structured so that they are repaid at different times. For example, you might take out a 30-year HELOC that will be paid back in 15 years while also refinancing your 30-year fixed rate loan with another 30-year fixed rate loan due to lower interest rates or better terms on your new mortgage.

9. Can I combine my first and second mortgages into one loan?

You can combine your first and second mortgages into one loan. This means that you’d have a single monthly payment that includes both mortgages, rather than two separate payments.

Some lenders offer this option, but not all do. If you do get the opportunity to combine your loans into one payment, it might be worth considering because of the potential for savings on interest costs.

Takeaway

Knowing the benefits of a home equity loan or line of credit can help you make the right decision for your situation. A home equity loan is an alternative to taking out a personal loan or credit card if you need funds for a project, but there are also tax advantages that come with it as well as some restrictions on using it. If you want to learn more about how this type of financing works and what options are available in your area, speak with a lender today!

 

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