 Dear
Dr. Don,
My home is debt-free. I want to tap my equity
at a less than 80 percent loan-to-value ratio
(the percentage of the home's price paid for by
a mortgage) for home improvements and investments.
I also want the proceeds to be tax deductible.
Am I eligible for a first mortgage or do I have
to take out equity loans at higher rates?
-- George Glean
 Dear
George,
The loan proceeds are tax-free! It's the interest expense that you want to generate a tax deduction. Because I don't know the particulars of your loan, you'll have to talk to a tax professional or review IRS Publication 936, "Home Mortgage Interest Deduction" for answers about whether the loan interest generates a tax deduction.
On a first mortgage, there is no
other loan with a higher security interest in
the property. Home equity lines of credit, or
HELOCs, and home equity loans are not second mortgages
if there's no mortgage in front of them in the
pecking order.
A home equity line or loan should be priced based on the risk inherent in the loan. It should have a lower interest rate if there's not a conventional first mortgage ahead of the home equity line or loan.
Home equity lines and loans typically have much lower closing costs than a conventional fixed-rate mortgage. However, the interest rates on these loans are higher than a conventional fixed-rate mortgage. As I write this, the Bankrate national averages are 7.88 percent for a HELOC, 8.06 percent for a home equity loan, and 6.42 percent for a 30-year fixed-rate mortgage. Even if you have great credit, the rate on a home equity loan or line isn't likely to be close to the rate you can get on a conventional mortgage.
Borrowing against the house to invest has its own set of issues. I don't think it makes sense for most homeowners, but it may make sense for you. Keep in mind that the money is already invested -- in real estate. You're just leveraging that investment to invest elsewhere.
|
