Home equity loan and home equity line of credit basics - TIAA-CREF

Home equity loan and home equity line of credit basics
Home equity loans are usually best for one-time purchases where you know the amount
you’re going to need. For example, if you plan to add a room onto your home, you might opt
for a home equity loan to finance it, allowing you to make fixed payments at a lower interest
rate than other types of financing.
HELOCs are generally preferred when the borrower needs periodic access to funds, such as
making a tuition payment or making an unexpected home repair. It’s best to use this for
specific reasons and pay down as much of the balance as soon as possible, just as you
would on a credit card. Every time you borrow against the equity in your home, you’re
extracting money from the return you’ll get on the home if you ultimately sell it. Also, by
securing the loan with real estate, you are pledging and putting at risk your residence if the
payments can’t be made.
Will my home equity loan or HELOC interest be tax-deductible
Another advantage of using home equity financing is that the interest may be tax-deductible,
provided you meet certain criteria. Since there are various restrictions on deductibility
based on tax filing status, ownership interest in the property, the amount financed, and how
the funds were used it is recommended that you consult a tax advisor regarding the
potential tax implications of this type of borrowing. IRS Publication 936 fully explains the
particulars of home equity debt deductions.
How do I qualify for a home equity loan or HELOC
Qualifying for a home equity loan or HELOC is similar to qualifying for a conventional
mortgage. You’ll be asked to fill out an application and provide proof of income, assets and
expenses. Be sure you review your credit reports with all three major credit reporting
agencies (Equifax, Experian, and Trans Union) before you apply to get a sense of your credit
scores and ensure that there are no errors that could cause you to be denied. Then, look at
your overall debt ratio and pay down as much as you can. Tip: For a free copy of your credit
report from each of the three major credit reporting agencies visit AnnualCreditReport.com.
The value of your home is another critical factor in determining whether your loan or line of
credit will be approved. In most cases, the amount of all loans and credit lines on a
property—including first and second mortgages, home equity loans, and home equity lines
of credit, and any other outstanding liens—cannot exceed 80% of the current property’s
market value. TIAA Direct has a useful Home Value Estimator that can give you an idea of
your home’s value. However, any lender will likely order a real estate appraisal to determine
the current market value of your home before approving the loan. If you obtain a HELOC, it’s
possible that your home equity line may change over time, depending on fluctuations in the
value of your home and overall market conditions.
You’ve worked hard to build equity in your home. Home equity loans and HELOCs are tools
that can make that equity work for you when you need to make big purchases or cover large
expected or unexpected expenses. Work with a reputable loan advisor to choose the best
option for your needs.
1
More Americans Paying Off Debt and Opening New Lines of Credit, Equifax.com, March 2013. http://blog.
equifax.com/credit/more-americans-paying-off-debt-and-opening-new-lines-of-credit/
The material is for informational purposes only and should not be regarded as a recommendation or an offer to
buy or sell any product or service to which this information may relate. Certain products and services may not be
available to all entities or persons.
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