Should You Tap Your Home’s Equity?

Should You Tap Your Home’s Equity?

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Among the many inaccuracies being doled out by the media these days is news about the housing market.

home financingCertainly, there are many homeowners who are in trouble, likely to lose their homes to foreclosure or suffer significant loss to the value of their homes. But there are many millions of homeowners who are riding out stormy seas with some already coming out on the other side in improved shape. Those people are likely to help lead the recovery effort provided that Congress and the Obama administration back away from trillions of dollars in promised new spending.

But this article is not about politics. What it is about is tapping your home equity, money you have built up in your home after many years of ownership and market value increases.

Responsible Consumer Borrowing

Responsible consumers know that home equity should be used to finance important things in their lives including a home renovation project, fund college tuition, pay off medical bills, even debt consolidation. Of course, putting money out for anything beyond what would benefit the home directly has some analysts unnerved, but when used wisely it can be a smart decision.

There are essentially four options for most homeowners when it comes to taking out equity. Three are generally available to all homeowners while a fourth depends a lot on your age.

1. Home equity loans (HEL) – Sometimes maligned and occasionally abused, a home equity loan allows you to tap the equity in your home, receiving a loan with your home secured as collateral. In most cases a HEL is tax deductible and, if you sell your home, you will be required to pay off your loan along with your first mortgage.

2. Home equity line of credit (HELOC) – With your home secured as collateral, a credit line can sometimes be advantageous for the homeowner who wants a ready supply of cash available, but who plans to tap the line only when needed. A HELOC can be accessed for a number of years, and you are responsible for paying back only what you have borrowed. Your HELOC should be tax deductible.

3. Cash-out financing – This kind of loan describes when a homeowner decides to refinance his mortgage to obtain a new loan. That new loan exceeds the amount owed on the current loan with those extra monies available for whatever purposes. The advantage here is that there is only one loan involved and it is tax deductible.

4. Reverse mortgage. For senior citizens who want to stay in their homes, a reverse mortgage can allow them to do so especially if they have build up significant equity over the years. No payments are due until the borrower moves, dies, or if the property is sold. The final payment can not exceed the proceeds from the sale of the home, freeing heirs from further obligation. Work with an accountant to discuss your options as well as tax implications.

What type of loan is right for you? Ask your financial advisor who can discuss tax advantages as well as help you map out a repayment plan.

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Categories: Home Financing

About Author

Matthew C. Keegan

Matt Keegan is a freelance writer and editor as well as publisher of "Matt's Musings", his personal blog. Matt covers campus, consumer, business and financial topics on various websites and blogs, and has been published in the "Houston Chronicle", "Sam's Club Magazine" and "Wisconsin Golfer".