This article was originally published on blog.figure.com on 01/29/19.
There are a number of benefits to owning a home, but few can convert to cash. Home equity (the difference between the market value of your home and your current mortgage balance) is an exception. It enables homeowners to use their equity in the form of a home loan, home loan line (HELOC), or a combination of both.
According to the Federal Reserve, the total home equity held by homeowners in the United States is over $ 13 trillion, and for many, home ownership is their greatest financial asset. Using this asset, homeowners can achieve both long-term and short-term financial goals, such as: Consolidate debt or Financing do-it-yourself work and repairs.
Despite the abundance of home equity in the United States, there is a lot of misinformation about what homeowners can actually do with a home loan or line of credit. Here are some of the biggest myths, along with a few facts to make them clear.
Myth # 1: Home equity can only be used for home improvement.
Fact: Once the home equity has been converted to cash through a home loan and / or line of credit, borrowers can use the funds at their discretion. Many borrowers use the funds to finance large expenses such as home improvement and repairs, education costs, and even debt consolidation. The possibilities go well beyond these few, however. For example, some people resort to home equity to fund a new business venture. Others use it to offset the cost of retirement. Aside from financing a home renovation, there are many ways to use your equity wisely.
Myth # 2: Home loans and lines of credit are like credit cards and personal loans.
Fact: Home loans and HELOCs are similar to other credit options – such as credit cards and personal loans – in that they all provide access to much-needed funds. However, they differ in several ways. Perhaps one of the most significant differences, especially when it comes to home equity, is that HELOCs and home equity loans are secured debt while credit cards and personal loans are unsecured.
What does that mean? Secured loans are secured by an asset or security, in this case a home. Because home loans and HELOCs are secured debt, interest rates tend to be significantly lower than credit cards and personal loans, making them more affordable.
Many homeowners with increasing credit card debt and high interest rates believe that home equity is an inexpensive way to consolidate and pay off debt within a set period of time.
Myth # 3: Taking out a home loan is a long process and requires a trip to the bank.
Fact: This may have been true in the past, but new home ownership trends have made it easier and faster for homeowners to use their home equity.
Some lenders allow potential borrowers to apply online using their desktop and mobile devices, making it easy to submit loan applications from home. While the home loan process once took several weeks (and still often does), there are some lenders who can process the loan in just one week.
Myth # 4: Home equity loans are no longer tax deductible.
Fact: The 2017 Tax Cut and Employment Act introduced new restrictions on home mortgages, and as a result, deductions for home loan interest rates and HELOCs were restricted and in some cases suspended from 2018 to 2026 IRSTaxpayers who use a home loan or line of credit to “buy, build, or significantly improve” their home may still be eligible.
The IRS website states, “As of 2018, taxpayers will only be able to deduct interest on qualifying home loans of $ 750,000. The limit is $ 375,000 for a married taxpayer filing a separate tax return. These are below the previous limit of $ 1 million or $ 500,000 for a married taxpayer who files a separate tax return. The limit values apply to the sum of the loans that are used to buy, build or significantly improve the main and secondary residence of the taxpayer. “
In short, you may be able to deduct interest paid on a home loan. Contact a tax advisor who can guide you through the complexities of tax law to determine eligibility based on your own borrowing.
Myth # 5: Fees and acquisition costs make tapping your home equity a costly financial solution.
Fact: Many home loans or HELOCs have a fair share of fees and hidden costs – title fees, valuation fees, closing costs, and penalties for advance payments, to name a few. However, modern lenders are re-examining fee structures, and today some have drastically reduced those fees, creating a loan solution that is both affordable and transparent.
Myth # 6: Borrowers can access the full amount of their home equity through a home loan or HELOC.
Fact: A home loan enables borrowers to access a significant portion of their equity. According to the Federal Trade Commission, there is usually a limit to the amount a homeowner can borrow 85 Percent of total available equity. In some cases it is possible to borrow more, but many experts advise borrowers not to take advantage of the maximum available to them and instead suggest keeping a cushion to protect their investment in case property prices go over the top Time fluctuate.
Of course, the amount of equity in your home is not the only factor that controls the total amount of your loan. Most lenders also take into account the creditworthiness, income, and debt-to-income ratio of the borrower when determining the total loan amount.
Myth # 7: It takes years for home equity to emerge. Therefore, you must own your home for several years before you can use it.
Fact: In some cases, depending on the type of mortgage, homeowners may have equity once they make their down payment. For example, a homeowner who secures a traditional mortgage to buy a home with a market value of $ 250,000 and pays a down payment of $ 37,000 will take out their mortgage with 15% equity.
Assuming that the value of a home remains the same (or increases), home equity grows with every mortgage payment provided it is financed with a traditional loan. The opposite can also be true. Some borrowers take interest-free loans and only pay interest in the first few years of their mortgage, which means that they do not cut off the capital of their loan and consequently do not increase their equity. More importantly, when the home price falls, so does equity. If the home’s value drops dramatically, a home could be “underwater,” meaning the homeowner owes the home more than it’s worth.
For many homeowners, using their home equity offers a means to an end, be it debt consolidation, home repairs, or the next big step in the life cycle. When considering a home loan, be sure to work with a lender who can help you separate the facts from the fiction so you can make an informed decision about your current and future investment.