4 Home Equity Loan Questions Answered
What are the biggest advantages of a home equity loan?
Probably the biggest advantage of a home equity loan for a borrower is that it is typically a lower interest rate loan than an unsecured loan. Your home serves as collateral, so it’s less of a risk to the lender, hence a lower interest rate. This can translate into a lower monthly payment. Home equity loans also offer a homeowner flexibility in how they spend the money. You can spend it on just about anything, from home improvements to college tuition, emergency expenses, medical bills, and more. You can even use a home equity loan to pay down higher-interest debt, such as credit card debt. Finally, a home equity loan typically has a fixed interest rate, which will provide a borrower with a stable monthly payment that does not fluctuate.
How do I know if I qualify for a home equity loan?
Your Benchmark Federal Credit Union Loan Officer will be able to help you determine the equity in your home. This will be the value of your home less any outstanding liens, such as your mortgage or any other home loans. They will also calculate your loan-to-value ratio (LTV). Finally, they will take a careful look at your credit score and your debt-to-income ratio. Different lenders will lend different percentages of your total equity. Be sure to compare home equity loan details from various lenders, including Benchmark.
For which expenses is interest on a home equity loan tax deductible?
As you are probably aware, tax laws have changed, so it’s always best to consult with your tax advisor regarding this question. In general, eligible uses for home equity include purchase, construction, renovation, or improvements of a primary residence or second home. This would mean structural changes and structural improvements would still qualify, but things such as new home furnishing and décor will not. Other non-deductible expenses include lifestyle expenses, such as vacations and big-ticket purchases, as well as education expenses and wedding expenses among other items. There is also a dollar limit for deductions, which your tax advisor can explain. There’s one final item we’d like to mention relating to this, you need to itemize to deduct eligible home equity loan interest. Again, we recommend you consult your tax advisor. You can also learn more on the IRS website.
What will I need when applying for a home equity loan?
Although this may vary by lender, here is an idea of what you will need:
- ID including your driver’s license or another valid form of photo id and your social security number.
- Any co-applicant information and ID.
- Proof of income, such as copies of your most recent pay stubs and W-2s.
- Proof of any supplemental income, such as rental income.
- Employment information and employment history.
- Federal tax returns. Again, this may depend on the lender and also if you are self-employed.
- Information pertaining to the property, address, etc.
- All liens on the property and information on liens you will be paying off.
- Copy of current mortgage statement(s).
- Other payoffs if you’ll be using your loan to pay off debt.
- A list of your creditors and account balances.
- The purpose of the loan.
- Proof of homeowners insurance and flood insurance if needed.
- Other items as requested by your lender.
We’ve hoped our home equity loan Q & A has helped you to better understand the intricacies of a home equity loan. The lenders at Benchmark Federal Credit Union would be happy to answer any additional questions you may have. You can contact us easily by phone or online.