The Home Equity Loan
by Bert Holtje
Business terms have a way of changing to suit the times. Back in the 1930s, when people were losing their houses all over, second mortgages were a way of keeping them. The term “second mortgage,” while a welcome relief from the debt collectors, was a pejorative. Today, however, the term has been replaced by the more socially acceptable term “home equity loan.” Social history aside, a home equity loan is a loan made against value in the house, and these loans are available in most states. But just to be sure, check it out with your banker first. Repayment terms are usually calculated on the ability to repay the combined payments of both the first and second mortgage, all of which is measured relative to your income. In the 1930s, these combined payments were often a terrible burden. Today, however, second mortgages are seldom seen as a way of keeping a home out of the hands of the sheriff. Rather, they are seen as ready access to money when it’s needed.
One of the chief benefits of these loans is that in some cases, interest on up to $100,000 of borrowed capital can be tax deductible, regardless of how the money is used. Given that second mortgage interest rates can be higher than interest on some other forms of loans, this tax deductible feature can have a lot going for the borrower — but remember to check with your tax advisor.
In some cases, banks will make these loans as a line of credit, rather than outright cash loans. The money is made available to you to use when it’s needed. This can be especially helpful for an agent who sees his or her capital needs as steady over certain period of time, rather than needing an in-hand amount of money.
Bankers making home equity loans are usually very careful about credit ratings and the borrower’s ability to pay back the principal and the interest. But, if you’re borrowing for expansion and can show good credit and an ability to turn your efforts into money, banks will probably be quite willing to make you a home equity loan.
There are some pitfalls to watch out for with these loans. For one thing, home equity loans usually carry a higher interest rate and must be paid off in a shorter period than first mortgages. These loans also require payment of fees like first mortgages. And, if you use the home equity loan as a line of credit, the paperwork required each time money is needed is often extensive and time-consuming. This is understandable from the bank’s perspective. Your personal finance picture may have changed considerably from the time the terms were originally agreed on. We’ve been told that some home equity loans may require a balloon payment after a certain period of time, which means that the entire amount, plus interest, may come due all at once. Make sure that you know everything about the terms of a home equity loan before you undertake the debt.
Next month we’ll examine the pros and cons of the reverse mortgage as a financing vehicle.