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Home Equity Loans for a Newly Married Couple

Home loans for new couplePurchasing your first home together can be almost as exciting as your wedding day. If you’ve made that first major purchase together before tying the knot, you may have already built up some equity in your home that can be used for repairs and renovations. Whether you plan on using a home equity loan to put an addition on your home or undertake maintenance on your existing home, here are a few things you should know before enquiring about a home equity loan.

Get Appraised (And Know How to Calculate Your Equity)

When determining your home equity, you will first need to have your home appraised to determine its current fair market value. Once appraised, take your home’s fair market value and subtract the amount of money you still owe on your mortgage. For example, let’s say you bought your house for $250,000. Having paid $50,000 as a down payment, your mortgage is now $200,000.

Fast forward to the future when you decide you want to apply for a home equity loan. At that time, you have paid off $125,000 of your mortgage. After an appraisal, you discover that the new market value of your home has risen in value to $300,000. Since you have paid off $125,000 of your mortgage, you still owe $75,000.

$200,000 – $125,000 = $75,000

Take your new fair market price of your home and subtract what you still owe on your mortgage, giving you the amount of money you qualify for your home equity loan, $175,000.

$300,000 – $75,000 = $225,000

This is the total equity available. A bank will typically lend 70-80% of the total equity available.Now that you understand home equity, you have two main options: You can either get a Home Equity Loan (HEL) or a Home Equity Line of Credit (HELOC).

Option 1: The Home Equity Loan

Also known as a “second mortgage,” a HEL gives you a lump sum of cash with a fixed rate of interest. You will have fixed monthly payments for a fixed amount of time, normally between 5 and 15 years. A huge benefit to this option is you won’t be surprised by fluctuating interest rates.Some people use their HEL to help pay off their student loans or credit card bills upon discovering that their HEL interest rate is lower than their student loan and credit card rates. This isn’t always the case. Your HEL rate might not be lower than your other rates, but it is worth your time to determine whether your HEL can assist you with your newly-combined household finances, as well as home improvement projects.

The Home Equity Line Of Credit

A HELOC is a credit line given to you by a lender. You have a maximum amount that you can borrow and are given blank checks or a debit or credit card that allows you to withdrawal from those funds. This allows you to borrow what you need when you need it, instead of taking out one lump sum. You don’t have to withdraw the maximum amount. This just means that the amount of money you are paying interest on has the potential of being significantly lower than your determined equity. Keep in mind that there may be transaction fees each time you withdrawal money. Help from Uncle Sam

The IRS Publication 936, “Home Mortgage Interest Deduction,” offers some helpful advice to newlyweds with home equity loans at tax time. It states that joint tax filers can deduct the interest paid on a maximum $100,000 in home equity loans. The maximum is cut in half if the married couple files separately. Keep in mind, this is a maximum and chances are you will not get to deduct near that amount. This deduction also only applies to home equity loans taken out for home improvement purposes.

Remember

Armed with some knowledge beforehand, you can decide which home equity loan option is best for you and your home – and the vision you have in mind for it.

This post was written by Holly Wolf of Conestoga Bank. Conestoga Bank has serviced Philadelphia and the surrounding regions for 120+ years.

This publication does not constitute legal, accounting or other professional advice. Although it is intended to be accurate, neither the publisher nor any other party assumes liability for loss or damage due to reliance on this material.

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Date:
July 16, 2013 um 6:51 am
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