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Home
Equity Line of Credit May Have Tax Benefits
Anybody who owns a home may qualify for a home
equity
line of credit.
A home equity line of credit can be used for any
number of things, including paying for expensive
renovations intended for the home, consolidating
credit card
debt, paying off large loans, or for having cash
on hand.
The
limit on a home equity line of credit usually
depends on how much a house is worth versus the
dollar amount of the mortgage(s) currently on the
home. The amount, or limit, may be a few thousand
dollars, or can be up to several hundred thousand
dollars. The total available for a line of credit
will all depend on the value of the home.
One
of the positive aspects of a home equity line of
credit is that it can sit idle until it is needed.
For example, if a line of credit is opened for
$10,000, and only $2,000 is needed, interest will
only be charged on the portion that is being used.
The remaining $8,000 of the
credit line
remains available for future use.
When a home equity line of credit is opened, the
lender will likely provide a few different ways to
easily use the credit. The borrower will probably
receive a checkbook so that checks may be written
against the line of credit. Also, the borrower
will probably be given a credit card. When the
credit card is used, the purchases will apply to
the line of credit.
A
line of credit must be paid according to the terms
of the credit agreement. However, the terms of the
agreement will probably require the borrower to
send monthly payment to the lender, with a minimum
amount due each month. The minimum amount due is
usually calculated according to the percentage of
the total amount of the loan currently being used.
Some lenders may ask for a specific dollar amount
as the
minimum payment
each month instead of a percentage of the loan.
As
with regular types of mortgages on homes, the
interest charged to the borrower of a home equity
line of credit may be able to deduct a certain
amount from their yearly federal taxes. Every
situation is different, but it is a possibility. A
certified public accountant should be able to tell
any potential borrower if home equity lines of
credit can be beneficial in terms of taxes.
A
home equity line of credit is not the same as a
credit card because the amount of the loan is
backed by the value of a home. With a credit card,
if the total amount due is not paid within the
terms of the agreement, penalties can be added and
a person’s
credit score
can be affected. When a person defaults on a home
equity line of credit, however, the bank can put a
lien on the home and even foreclose upon it.
When beginning to look at home equity lines of
credit, it can become obvious very early in the
search that there are many options. Using a
mortgage broker will allow the borrower to compare
and contrast the differences between the various
loans available. There may be variations in the
terms of the loan, the
interest rate
(and whether or not it’s fixed or variable), and
the number of years it can remain open. In
addition, different loans will have different fees
and closing costs associated with them.
Before a home equity line of credit can be
approved, there are several steps that must be
completed. If a mortgage broker is used, he or she
will explain all of the details on how to obtain
and close the loan. One of the first steps is
usually filling out an application. After a
preliminary approval, an appraisal will probably
be done on the home. When the numbers are worked
out, more forms must be completed and signed.
Finally, when the loan is approved, the borrower
may begin using their new line of credit.
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