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TABLE OF CONTENTS |
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Q. | Should I prepay my mortgage? | |
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Q. | When should I refinance my home? | |
A.
Refinancing becomes worth your while if the current interest rate
on your mortgage is at least 2 percentage points higher than the prevailing market rate.
Talk to some lenders to determine the available rates and the costs associated with
refinancing. These costs include appraisals, attorney's fees, and points. Once you know what the costs will be, determine what your new payment would be if you refinanced. You can estimate how long it will take to recover the costs of refinancing by dividing your closing costs by the difference between your new and old payments (your monthly savings). Be aware that the amount you ultimately save depends on many factors, including your total refinancing costs, whether you sell your home in the near future, and the effects of refinancing on your taxes. TABLE OF CONTENTS |
Q. | What is a home equity line of credit? | ||||||||||
A. A home equity line is a form of revolving credit in which your home
serves as collateral. Because the home is likely to be a consumer's largest asset, many
homeowners use their credit lines only for major items such as education, home
improvements, or medical bills--not for day-to-day expenses. With a home equity line, you will be approved for a specific amount of credit your credit limitmeaning the maximum amount you can borrow at any one time while you have the plan. Many lenders set the credit limit on a home equity line by taking a percentage (say, 75 percent) of the appraised value of the home and subtracting the balance owed on the existing mortgage. For example:
In determining your actual credit line, the lender will also consider your ability to repay by looking at your income, debts, and other financial obligations, as well as your credit history. Once approved for the home equity plan, you will usually be able to borrow up to your credit limit whenever you want. Typically, you will be able to draw on your line by using special checks. Under some plans, borrowers can use a credit card or other means to borrow money and make purchases using the line. However, there may be limitations on how you use the line. Some plans may require you to borrow a minimum amount each time you draw on the line--for example, $300--and to keep a minimum amount outstanding. |
Q. | What are the costs of obtaining a home equity line of credit? | |
A. Many of the costs in setting up a home equity line of credit
are
similar to those you pay when you buy a home. For example these fees may be charged:
You also may be charged a transaction fee every time you draw on the credit line. |
Q. | What is an interest rate "lock-in"? | |
A. If you decide to apply for financing with a particular lender, and if you do not want
to let the interest rate "float" until closing, get a written statement
guaranteeing the interest rate and the number of discount points that you will pay at
closing. This binding commitment or "lock-in" ensures that the lender will not
raise these costs even if rates increase before you settle on the new loan. You also may
consider requesting an agreement where the interest rate can decrease but not increase
before closing. If you cannot get the lender to put this information in writing, you may
wish to choose one who will. Most lenders place a limit on the length of time (say, 60 days) they will guarantee the interest rate. You must sign the loan during that time or lose the benefit of that particular rate. Because many people are refinancing their mortgages, there may be a delay in processing the papers. Therefore, contact your loan officer periodically to check on the progress of your loan approval and to see if information is needed. |
Q. | What disclosures must a lender give you? | ||
A. For a financing, the lender must give you a written statement of the costs and terms
of the financing before you become legally obligated for the loan, as required by the
Truth in Lending Act. You usually will receive the information around the time of
settlement, although some lenders provide it earlier.
If you refinance with a different lender, or if you borrow beyond your unpaid balance with your current lender, you also must be given the right to rescind the loan. In these loans, you have the right to rescind or cancel the transaction within three business days following settlement, receipt of your Truth in Lending disclosures, or receipt of your cancellation notice, whichever occurs last. |
Q. | What is a reverse mortgage? | ||
A.
A reverse mortgage is a type of home equity loan that
allows you to convert some of the equity in your home into cash while you continue to own
the home. Reverse mortgages operate like traditional mortgages, only in reverse. Rather
than paying your lender each month, the lender pays you. Reverse mortgages differ from
home equity loans in that most reverse mortgages do not require any repayment of
principal, interest, or servicing fees as long as you live in the home. The reverse mortgages benefit is that it allows homeowners who are age 62 and over to keep living in their homes and to use their equity for whatever purpose they choose. A reverse mortgage might be used to cover the cost of home health care, or to pay off an existing mortgage to stop a foreclosure, or to support children or grandchildren.
When the homeowner dies or moves out, the loan is paid off by a sale of the property. Any leftover equity belongs to the homeowner or the heirs. |
Q. | What loan interest is tax-deductible? | |
A.
The deductibility of interest has been limited in
recent years. The following types of interest are at least partially deductible:
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Q. | What are the limitations on deductibility of mortgage interest? | |
A.
Generally, interest expense on the taxpayers primary residence and a second (but
not a third) home is deductible. Interest is only deductible on the first $1,000,000 of
the acquisition loan. As the loan is paid off the limit is reduced. In other words you can
not refinance a loan for a higher amount than the current principal balance and increase
the deduction. In addition interest on a home equity loan of up to $100,000 can be
deducted.
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Q. | Is interest expense incurred for business purposes deductible? | |
A.
Yes. Interest expense incurred for a trade or business is deductible against the
income of that business. For example, if your are self-employed the business interest
would be deducted on Schedule C.
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Q. | Is investment related interest expense deductible? | |
A.
Yes. Investment interest is deductible up to the amount of investment income.
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Q. | Is interest on educational loans tax deductible? | |
A.
For FAQs on
deducting education loans, see Tax
Strategies.
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Q. | When can you stop paying private mortgage insurance? | |
A. Generally, if you make a
down payment of less than 20% when buying a
home, the lender will require you to buy private mortgage insurance. You can generally
drop the PMI when you have attained 20% equity in the home, or when the value of your home
goes up (due to a good real estate market) so that your equity constitutes 20%. Some lenders require you to keep the PMI forever, and others make you keep it at least five years. To find out whether you can cancel the coverage, send a letter to your mortgage servicing company (the company to which you send your mortgage payments). This will get the process started. You may be required to pay for an appraisal, and you will need to have a good payment record. If you are able to cancel the insurance, you will receive any prepaid premiums that are in your escrow account. |