November 15, 2011 — Americans have caught on to the advantages of using the equity in their homes as an efficient, lower rate and tax-deductible form of credit, whether it’s for paying off credit card debt, school tuition, or just taking a much-needed vacation.
However, home equity may even help you buy a home in some cases. Here are a few ideas:
Say a potential home buyer is making a 10 percent down payment—not quite the 20 percent needed to avoid private mortgage insurance for the loan program they chose. As an alternative, they could take out a home equity line of credit and close the line at the same time as their purchase mortgage. At closing, the line is used immediately to bring the down payment to the level needed to avoid PMI.
Jumbo Loan Without a Jumbo Rate
Much like the previous example, a credit line could be opened at the same time as the first mortgage. Some borrowers will be able to add part of the credit line to the down payment at closing to bring the loan below the conforming loan limit. This could mean savings in rate, and potentially easier qualifying, depending on the loan type.
The Home’s Next Deposit
For those who are house rich and cash poor, home equity credit may be a good source of funds for the escrow deposit on the next home purchase. The home equity loan or credit line would be paid along with the first mortgage from sales proceeds. This option is often used not just for a new primary residence, but also as a down payment for an investment or vacation home, where the extra home equity payments are affordable but the full down payment isn’t readily available from savings. Be sure to ask your lender for details about when this option can be used.
Helping Out the Kids
With down payments becoming increasingly difficult to save, many parents are willing to extend their own money to help the kids, or other relatives, purchase a new home. Home equity credit can be an effective source for borrowing the money while enjoying potential tax deductibility.
Check with your lender for more details on how home equity may be able to help you.