Home Equity Loan Lowdown

125% Home Equity Loans

You face major expenses when you pay your son’s college tuition or maybe it’s your daughter’s car payment and you consider taking a new loan to get through these big payments. However, what is available to you are expensive loans or credit options that will in the long run hit you hard. Before you lose heart... There are cheaper alternatives.

Mortgage refinancing is the cheapest form of borrowing available and it's even better when it’s a home equity loan.

Home equity loan lets you borrow on the equity you have in your home.

Equity is nothing but the difference between the current market value of the property and the amount you still owe on the mortgage. In simpler terms equity is the amount, if any, you would receive after selling a property and paying off the mortgage.

But what if you have not yet built up any equity in your loan? The loan providers have come with options for this situation too. Your option is a 125% home equity loan.

Your lender will first value your home and come with latest value and then will look at your current mortgage value and the amount you still owe on it.

I can explain 125% home equity loan better with an example – If the appraised value of your home is $100,000 the lender will go up to 125% of the appraised value and is prepared to offer up to $125,000 on your home.  So, if you still owe $60,000 from your first mortgage then that is deducted from the total probable loan amount giving ($125,000-$60,000) which is $65000 - the maximum amount you can get through the new loan.

Lenders offering 125%home equity loan can also decide on the amount by looking at your credit score. Others might be interested in how long you have lived in the home as a factor and the minimum requirement is 3 months. It’s the best form of borrowing, in my opinion, especially when you have major expenses.

Taxes - Savings and Deductions In Home Equity Loans

Scouring around for tax information on refinanced mortgages has been my latest errand almost every homeowner I know has refinanced and surprisingly not many were bothered about the taxes. But, now that the tax time is near every one wants to know about deductions and savings. So here are a couple of points...

Charge-deductions: There are points when you refinance and these points are there to calculate charges on loans taken out by you. The usual rate is one point for every one percent of loan amount. This is where you can get some deductions. These charges or points can be deducted and if this not your first time refinancing you can deduct the remaining points from your previous loan. The points from the present loan will be deducted over time.

There are tax savings: Up to a loan amount of $100,000 on home equity this is true. Even how you used the $100,000 is not a concern, so you can be relieved.  However, if you borrowed more than $100,000, the whole scenario changes and questions regarding how you spend the amount and should you be taxed the minimum tax etc are all raised. So, all those home improvement you made or the fancy cars you brought are all going to be scrutinized if your home equity loan amount was over $100,000.

The $100,000 clarification: This point is better explained with an example. If you had taken out a home equity loan of 190,000 and your loan amount of the first mortgage was only $100,000 you can deduct the whole amount. The difference between the new loan and old mortgage, if over $100,000, you are in the taxable bracket.

Most of us are sitting pretty by cashing out on home equity and though we have all have heard about the changes in interest and the ripple effects on our monthly cash outflow, surprisingly, few of us are really clear about taxes and deductions in refinancing.

Home Equity Loans - Still In Vogue

To all those people who say home equity loans are passé, I have to say, it’s still a great way to refinance. Specially, if home values are still high in your area or have come down to a respectable sane amount after the zoom in prices in the last couple of years. Agreed, maybe it’s does not create mass hysteria like it did before but it could be your ticket out of huge credit card debts.

So what do lenders look into before extending a loan?

1. Your credit worthiness i.e. your, credit rating and income.
2. The amount of outstanding debts you have
3. The appraised value of your home
4. The amount outstanding on your first mortgage

How much money can you get on a home equity loan? Taking all the above points into consideration home equity loan providers can in the best case scenario extend up to 85% of the appraised value of your home minus the amount outstanding on first mortgage.

Things to ask your loan provider:
1. Length of the loan extended
2. Get info on how you can get access to your credit line by check or credit card or both.
3. Is there a minimum withdrawal requirement while opening account
4. After account is opened are there minimum/maximum withdrawal preconditions.

Questions pertaining to; time of the loan, withdrawal and renewing credit lines:
Some home equity loans come with a set fixed time or a draw period when you can withdraw from your account. Some plans may require you to pay all the outstanding balance, while others you may be allowed to repay your outstanding amounts over a fixed period and this needs to be verified. You will be in most cases able to renew your credit line after the withdrawal period is over. If this does not happen you may not be allowed to borrow additional funds.

Home equity loans are still a great option if you are reeling under debt but remember your home is the collateral.