Not everyone is comfortable with using home equity to help build a retirement fund, so I figured I’d take some time out to get back to basics once again. Let’s start by answering the question, “What is home equity?” Home equity is the value given to a home after you subtract the mortgage debt and any other charges or liens against the home.

Basically, if you bought your home for $80,000 and have paid $40,000 of the mortgage off, you have no outstanding debts toward the home and your home now appraises for $100,000, you would have built up a total of $60,000 in home equity.

Home equity is a somewhat popular way (I guess) to establish a substantial credit line or loan. Do you have a child going to college, need a small business loan, have a lot of credit card debt or large car payments? Your mortgage broker will love you. Borrowing from your equity, using a home equity loan, lets you use your home to pay off high interest debts or make a substantial investment that you may have otherwise never been able to do.

Before you run down to your bank, though, I think you should have some questions ready for your mortgage guy:

• What kind of loan is it? Your mortgage lender may set you up with a HELOC (home equity line of credit–which is like a credit card using your home equity as the credit line) or an amortizing mortgage (a mortgage with a set payment and payoff schedule).
• How much money is available to borrow? (Depending on individual credit history, some lenders may allow you to borrow up to 85% or more of the appraised value of your home).
• Is the interest rate fixed or a variable rate? (HINT: HELOCs are usually a variable rate)
• What fees are being charged? It’s generally a good idea to know what you’re being charged on the loan (just a suggestion). Obtain a list of all the fees that will be charged in addition to the interest. Lenders may require payment only on the interest until the account closes or they may have a minimum monthly payment.
• Are there refinancing options? If you take out a HELOC, it may be possible to re-negotiate with the lender to extend the life of the account or convert it to a fixed term loan when the HELOC’s revolving credit account is scheduled to close.

In addition to getting a credit line for a large expense, the interest paid on a home equity loan may be tax deductible for loans up to 100% of the home’s value. With that said, I’m not a mortgage or tax specialist. You should check with a tax advisor, but I think this tax break may make the effective interest cost less than other kinds of loans if you’re able to deduct the interest.

You might also like

1. How To Leverage Your Home Equity To Make $1 Million
2. Mortgage Meltdown Part 2
3. The Secret Inner-Workings of Equity Indexed Annuities EXPOSED!
4. Your Home Is Not An Investment
5. Equity Indexed Annuities Get A Bad Rap, But Do They Deserve It?

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This entry was posted on December 6th, 2011 by David C Lewis, RFC. Edits may have been made to keep this entry current. · No Comments · Asset Preservation, Budgeting & Money Management, Retirement Planning