If you’re a homeowner, there’s no better way to secure an affordable source for financing. By using your equity as collateral, you gain a lucrative borrowing amount at a low rate. It is flexible, economical, and convenient!
Like many ESSA loan products, you can tailor this loan to fit your needs. Consider two options, both of which offer unique benefits:
The amount you can borrow is based on the equity established. Your equity is the difference between your home’s appraised value and the amount owed on your first mortgage or other liens. Typically, you can borrow up to 80% of your established equity, which we call "LTV," or the loan-to-value.
To find your available borrowing amount, take 80% of your home’s appraised value, minus your first mortgage.
$100,000 Home’s Appraised Value
x .80 LTV (Loan-to-Value)
<$50,000> Less First Mortgage
= $30,000 Available Borrowing Amount
The greater your equity, the greater your borrowing amount. Your equity will naturally increase over time as your mortgage balance falls. Once you’re in your home for five years, you should start to see a jump in your equity. It can also increase if your property value rises due to market conditions, the economy, or improvements you make.
It may be worthwhile to pay for an appraisal to see if your home has increased in value. Your home’s worth is influenced by where you live, home values in your neighborhood, and your home’s condition. You can look at comparable sales in your community as a guideline, but only a qualified appraiser can give an official valuation. Additionally, determining your available equity can help prioritize how you’ll use the funds.
Using your home as collateral, you benefit from an excellent low rate to finance your projects and purchases. However, realize that a second lien is placed on your property, which means slightly more financial risk. But taking an informed approach and using the funds wisely, home equity financing is one of your most sensible loan options. And it certainly is one of your most versatile.
Along with an excellent rate, homeowners may benefit at tax time. According to IRS.gov, home equity interest may still be deductible: “… taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC), or second mortgage, regardless of how the loan is labeled.”
It adds that “… the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build, or substantially improve the taxpayer’s home that secures the loan.
Under the new law, for example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not.”
For specific tax questions, please contact your tax adviser.
If you need help estimating your equity, understanding potential tax benefits, or applying, call us or click here. We can also compare the advantages of a fixed-rate home equity loan or an equity line.