Home Equity Loan Definition

The traditional home equity loan, commonly known as the "second
mortgage" is simply a loan keyed to the equity in your home.  This
traditional second mortgage loan provides you with a fixed lump
sum of money immediately.  The home equity loan is repayable
over a fixed period, usually in equal monthly installments that will
pay off the entire loan within that time.  The interest rates on home
equity loans are ordinarily fixed for the life of the loan.

A home equity loan can be either a fixed rate mortgage or an adjustable
rate mortgage.  Funds borrowed from the traditional home equity loan start
accruing interest immediately after the lump sum is disbursed.  Once
you get the money, you cannot borrow further from the loan.  The interest
on your home equity loan is almost always tax deductible. 


Interest Deduction for Home Equity Loans

To qualify to deduct the interest on your home equity loan, you must
deduct the lesser of:
 

$100, 000 ($50,000 if married filing separately), or   The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt.  Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home.

Home Equity Loan Conditions
The conditions for home equity loans are similar to that of the
conditions for home mortgage interest, with the exception being
that the amount you can deduct is smaller.
 

Total home equity debt cannot exceed $100,000. The debt must be secured by your residence. The debt can apply to your main or second home. You are personally obligated for repayment of the debt.

Home Equity Loan Example
Nathan Brandt purchased a house in New Jersey in 2001 for $300,000
with a mortgage of $250,000.  In 2007, the mortgage is $230,000 and the
value of his house is now $400,000.  Nathan decided to take out a home
equity loan.  Interest on a home equity loan of up to $100,000 is fully
deductible.  Notice that his house has appreciated to $170,000 ($400,000 -
$230,000) but he may only deduct up to the threshold amount of $100,000. 


General Home Equity Loan Facts
The second mortgage carries rights which are subordinate to those
of the first.  Lenders who are in the first position have the primary lien
against the property.  They would be able to foreclose on the property
should a borrower default because of their primary lien position.  The
second lien position relates to the amount of money loaned and that
second position.  A second lien holder would find much more difficulty
foreclosing on the property.  This is the reason second mortgage
rates are typically higher than first mortgage rates, to compensate for
the higher risk.

The traditional home equity loan is generally used to consolidate
other debt with high interest rates (like credit card debt), to finance
large expenses (like a wedding or college education), or to
purchase other costly items (like a new car or an investment
property).  Home equity loans are usually for a shorter term than
first mortgages.  Equity loans typically have a life of five to fifteen
years. 



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