Home Equity: Your Ace In The Hole
Almost 15 years ago, you bought your first home. You’ve been diligent in working and paying on the mortgage, and finally have more equity than mortgage. Ah, the sweet smell of victory, and home ownership. But are you playing the financial investment game as well as you think? Are you missing out on tax savings, funding strategies, or just plain smart money options? How do you check your equity options versus your tax savings options, to comparative shop and make use of your smart options?
Today, the tax benefits of retaining a mortgage on your home far outweigh the benefits derived from complete home ownership. Mortgage interest is fully tax deductible, and so are some of the options that come with equity lines of credit, second mortgages, or equity mortgages.
Borrowing against the equity in your home in order to pay off credit card debt, fund college educations, fund additions or needed repairs to the home, or to provide startup capital for that dream of owning your own business, is a tax advantage. Interest on first and second mortgages in general is fully tax deductible, and if you’re borrowing to fund education related expenses, or start that new business, some or all of those expenses are going to be deductible. It’s a win-win situation.
How is the dollar value you have in your home established? Well, there a couple of different ways that lending institutions determine home equity. If you’re dealing with a local bank that has held your mortgage since inception, many will not require an appraisal of the home, they will simply use the original established value of the home. Now, if you believe your home to be worth quite a bit more than the original appraisal value, you might want to request a new appraisal, but appraisals aren’t cheap.
In general mortgage companies will always require a recent appraisal before lending money against residential property. Either way, the equity in your home is established based on the current dollar value of your home, less any monies already owed against the property (that would be your first mortgage). There is an additional piece of information worth noting here. Usually, a lending institution will only lend a certain percentage of the homes value. With the creation of 125 loans, or loans where up to 125 percent of the value of the home is loaned, you may be able to borrow up to that amount, even with a second mortgage. 125 Loans, jumbo loans, and interest only loans are a relatively new market for home mortgages, and not loans that I would recommend, simply because they put the homeowner in a precarious position if the mortgage should be called in, if the home should sell prior to paying the mortgage down, or if a forced sale should occur.
Your home’s equity is a trump card, if you will adhere to some common sense rules and continue to stay abreast of your individual financial needs.