Find the answers to all your questions about home equity and home equity debt.
Mortgageloan.com can't help you understand why the sky is blue, or how a bunch of Internet jokes reignited Chuck Norris' fame. But we can give you the straightforward answers to some of the most commonly asked questions about home equity.
What is home equity?
Home equity is the unleveraged value of your home. You can calculate it by subtracting your total mortgage debt balance from the total value of your home. As your property value and mortgage debt balance change over time, so does the amount of your home equity. This total increases when your property value goes up, and/or your debt balance goes down; it decreases when your property value declines, and/or your mortgage balance increases.
How do home equity loans work?
Home equity loans are a type of mortgage that uses your home equity as collateral. That means that the lender extends credit to you in return for a lien on your home. If you fail to pay the home equity lender as agreed, you could face foreclosure. Home equity loans increase your mortgage indebtedness and, therefore, deplete the value of your home equity.
How is a home equity loan different from a home equity line of credit (HELOC)?
A home equity loan has a fixed interest rate and fixed monthly payments. You're given the money all at once, and you can't re-borrow the funds once you pay them back. A HELOC works more like a credit card-you can borrow and re-borrow funds up to your stated credit limit. HELOCs carry variable interest rates, and generally have low minimum payments.
How much can I borrow?
The total of your first mortgage debt and home equity debt can be as much as 80 to 125 percent of your home's value. Most lenders prefer to keep the percentage at 80 percent or less, so borrowing more than that will cost you. To calculate the dollar amount of borrowings available to you, multiply your home's value by 80 percent, and then subtract your first mortgage balance.
How can I use the money?
Home equity loans are often used to fund debt consolidation, home remodeling, or college tuition, but you can use them for any purpose you choose.
Is home equity debt tax-deductible?
The interest paid on home equity debt is usually tax-deductible up to $100,000, or $50,000 if you're married and filing separately. You can't, however, deduct interest on debt that exceeds the value of the property. If you use a home equity loan to substantially improve your property, it may qualify as acquisition debt rather than home equity debt. In this case, the debt may be tax-deductible up to the cost of the improvements. For further information about home equity tax deductions, please see IRS Publication 936.
With those mysteries solved, you can move on to more pressing concerns, like finding out which cable channel carries reruns of Walker, Texas Ranger starring Chuck Norris.