Consolidating mortgage home equity loan
The loan amount is based on the difference between the home's current market value and the homeowner's mortgage balance due. Your equity in the home serves as collateral for the lender.
The amount a homeowner is allowed to borrow will be partially based on a combined loan-to-value (CLTV) ratio of 80% to 90% of the home’s appraised value.
However, the Tax Cuts and Jobs Act of 2017 suspended the deduction for interest paid on home equity loans and lines of credit until 2026, unless, according to the IRS, “they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.” The interest on a home equity loan used to consolidate debts or pay for a child’s college expenses is not tax-deductible.
Fixed-rate home equity loans provide a single, lump-sum payment to the borrower, which is repaid over a set period of time (generally 5 to 15 years) at an agreed-upon interest rate.
Unfortunately, this scenario is so common the lenders have a term for it: reloading, which is basically the habit of taking out a loan in order to pay off existing debt and free up additional credit, which the borrower then uses to make additional purchases.
Reloading leads to a spiraling cycle of debt that often convinces borrowers to turn to home-equity loans offering an amount worth 125% of the equity in the borrower’s house.
If you are contemplating a loan that is worth more than your home, it might be time for a reality check.
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Of course, the amount of the loan, as well as the rate of interest charged, will also depend on the borrower’s credit score and payment history.
Traditional home equity loans have a repayment term, just like regular conventional mortgages.
If you have a steady, reliable source of income and know that you will be able to repay the loan, its low-interest rate and possible tax deductibility make it a sensible choice.
Obtaining a home equity loan is quite simple for many consumers because it is a secured debt.