Home Equity Line Of Credit
Home Equity Line Of Credit: In this article, wish to say about what a home equity line of credit is. Also, I will give you an example of yet you’d go about computing what your line of credit might be based on your level of, equity. So if you had home equity let’s say that the fair market value of the home.
You had it appraised and it was worth $135000 but you still had a balance due on your mortgage. You are the first mortgage you old $40000 now if we’re going to compute your home equity would be $95000 right. So this is the claim here that your lender has on your home and then this is the residual value of the equity that you have in the home. The idea of home equity lending is that you can go and you can tap into this as a source of credit. So you can almost use your home as a coin bank of kinds now.
There are a pair of ways in which you will able to try this and one is that you can get a straight-up loan at a fixed interest rate. Let’s say you end up getting a seventy thousand dollar loan or something and then you use that to pay college tuition for your kid or something like that. It’s a lump sum loan another way of doing it instead of the lump sum is you could tap into this source of credit and say what I would like to be a line of credit.
I want a line of credit and if you don’t know what a line of credit is let’s say that you’ve got a $60000 line of credit based on what your home equity is and then. So it’s saying that your lender is not going to give you a lump sum of $60000. They’re saying we’ve given you this line of credit that means at any purpose you may borrow up to sixty thousand. You can borrow up to that amount. You don’t have to borrow the whole amount. We’re not going to give it to you all right now but if you say look I need $5000 to buy a new car from my kid.
You can go ahead and drawdown up 5000 of that 60000 and usually, there’s like a term limit or something. It’s like every ten years it comes up and the lender gets to decide whether. They want to continue giving you that line of credit. So it’s not like it’s a permanent loan or so you get this revolving line of credit that you can tap into as you need it. I want to focus on the home equity line of credit. So how would you go about determining how big your line of credit is in the example that we gave above.
We have home equity of $95,000 but that doesn’t mean that you are going to be ready to get a revolving credit limit of $95,000. The lender wants to protect themselves and they might say you know it’d be risky to juice the lenders hold them out. They might do that and charge you a higher interest rate. In a ton of cases, they going to give you a percentage of that. So you would go about calculating it in a very similar way to a home equity loan you for plenty of lenders. You would begin with the fair market value of the home and then they would have some percentage the rate could be 75% percent could be 80%.
In this case, we’ll say it’s 80% and so the lender is going to take 80 percent of the fair market value of your home and that’s going to be. In this case a hundred and eight thousand dollars. I took the hundred and thirty-five thousand the home is worth and then took the lender’s rate of 80 percent. I said you know this will vary by lender. So this is varied by a lender so you want to check with your lender.
So that’s going to give us a subtotal of 108,000 but now we’re going to deduct the balance due when I talk about the balance due. I’m talking about the principal the remaining principle that you have on your loan and the amount that you still have left to pay off this loan. In this case, an example we gave above those $40000 that’s what you still owe the lender on your first mortgage right now you take that and you deduct it. I’ve got in parentheses to state I’m subtracting it and that’s going to give us $68000.
So in this example, this would be our home equity line of credit. It’s a line of credit with $68000 so again now what I want to emphasize. This is not a lump sum this is not like that means they’re going to give you $68000. Pay it back fifteen years from now it’s a line of credit. You will be able to faucet into it let’s say anytime in the next 5 years in the next ten years. You work that out with your lender. Whatever the term is but at any point up until that time. you’ll be able to faucet into up to $68000 and of course, you’re going to incur interest on this.
This is interest-free or something like that there’s going to be an interest rate that you will incur and there also be like. You might have other types of things you might have an inactivity fee so an inactivity fee. You say well what’s that well if you don’t tap into any of the credit for a couple of years. The lender says well we’re going to charge you $1,000 anyways you didn’t use this.
There’s some kind of inactivity fee then also there are other fees to a home equity loan in general. You’re going to have to pay the appraisal costs. So that they can figure out the fair value of your home is $135000. So there are fees associated with this above and beyond the fact that you’re going to have to pay an interest rate on this and so. You’re paying an interest rate on this. It’s important to remember this is a second mortgage.
So this is a second mortgage and so you might be saying hey wait can I deduct the interest from this because again it is a mortgage. In certain circumstances, the IRS is determined that you can so first off. We have to take a look at that line of credit and look at the size of it. If it’s less than $100,000 assuming you’re married filing for your tax status then interest may be deductible. When I talk about deductible talking about if you itemize like the interest on your first mortgage.
Now it would have to be less than $50,000 if your filing status is married. There’s also another condition is that the line of credit needs to be less than the fair market value of your home. That being reduced by the home acquisition debt which means is your first mortgage.
So you already have that you already borrowed money to buy the home. So you’re going to reduce the fair market value of the home by that if that amount is greater than the line of credit then to the extent. That is you might not be able to deduct the interest for your line of credit. So you might be wondering well why would somebody do this.
This is something that is you know risky behavior is it something that no this is a wonderful idea. Everybody should be doing it well depends on what you’re the situation is so now. If you have credit cards or something like that they have a very high rate of interest that you’re being charged. It might be helpful you say you know what I want to dip into this line of credit. I’m going to take $10000 out of this and I’m going to put it toward. My credit card debt paydown these credit cards.
The credit cards might have a much higher rate of interest than you’d be getting on this second mortgage and you’re revolving the credit line. You might be paying 5% wherewith the credit cards you’re paying 22%. You know what I’m going to take this money and then I’m going to pay it down toward the credit card balance or you need. You’d like to make some major repairs to the convenience to you.
Whenever you need it but bear in mind that by doing this. You are reducing the equity in your home because you’re borrowing against this equity that you built up equity. So now you’re reducing the equity because now you’re borrowing against it. What does that mean what do I care? Well, the very important implication of that is if you don’t make you if you don’t make your payments on this second mortgage.
You could actually lose your home. So it’s not something to take but it is an important kind of option that you have and the benefit of homeownership as you pay down the principal. So forth and build equity in your home you have this kind of nest egg that you could tap into. If you were to be able to get approved if you creditworthy enough and you find a lender that would give you a line of credit.
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