2nd Mortgage vs Line of Credit? CPA's

[bob4432]

i need to come up with a substantial amount of $$ quick, is it better to take a 2nd mortgage on my condo or get a line of credit with my credit union using my condo as collateral? which makes more sense tax wise? the amount of $$ i need is less than the amount of equity i have in my condo. the condos around me are selling for quite a bit more than what i paid for mine, if that makes any difference.

please help

 

[Mill]

Link

Second Mortgage is typically deductible as long as you don't exceed the value of the home. HELOC should be the same as well, but again you can't borrow more than the value of your home or 100,000.

 

[rpl318]

Tax wise, they are both equal. Both are considered 2nd mortgages so the interest reductions work the same way. The line of credit is more convenient in that it is revolving. You don't have to use all of the funds at once and once you pay back what you owe, you can start all over again (without refinancing). The rates on these lines of credit are variable (typically based on the Prime rate + a margin). The standard equity loan is a fixed rate 2nd where you get all of the funds up front (which means you are charged interest on the entire amount immediately). The fixed rate 2nd gives you less flexibility in that you cannot reuse the equity without refinancing. The rates on the lines of credit are a little lower than the fixed 2nd right now but their rates are increasing. Just do your research and find out which product best fits your needs.

 

[bob4432]

i looked at my credit union and it said a line of credit is 9.5% with an * saying - *APR = Annual Percentage Rate. Quoted rates reflect the lowest rate available. Your individual loan rate will be based on your personal financial situation and previous credit performance. Rate subject to change without notice. my credit score is good-excellent and this will be a one time deal

 

[Vic]

IIRC, you cannot deduct the interest on any part of a loan balance that exceeds $100k more than what you originally purchased the property for. Otherwise, both loans have identical tax advantages.

The key differences between the 2 are that the HELOC operates somewhat like a credit card on your home, with a revolving balance that you can borrow against as you pay it down and payments based upon what you owe. Unfortunately, HELOC's also have adjustable rates indexed to the Prime, which the Fed has raised 5 times in the last 7 months, and is expected to raise at least 3 more times this year. HELOCs are only available in one term, 20 years, with an initial draw period for the first 10 years. The traditional loan is usually available with a fixed rate and term (with a variety of terms), so that you know the payment and interest rate will never change, but its disadvantages are that the initial interest rate will be higher than the HELOC, and that you will never have the option of making a lower payment as the balance goes down, nor of being able to borrow against it again in the future without refinancing.

Whether you get a HELOC or a traditional 2nd mortgage, the actual interest rate and product available to you will vary greatly depending on your credit score and LTV (how much you borrow against the value of the property).


edit: you're right, Mill. Those 125% loans are not tax-deductible. Yet one more reason why I am so against them.

 

[Vic]

Originally posted by: bob4432
i looked at my credit union and it said a line of credit is 9.5% with an * saying - *APR = Annual Percentage Rate. Quoted rates reflect the lowest rate available. Your individual loan rate will be based on your personal financial situation and previous credit performance. Rate subject to change without notice. my credit score is good-excellent and this will be a one time deal

Look elsewhere. 9.5% is not a good rate for a HELOC, even with poor credit.

 

[bob4432]

basically my condo is worth ~$160,000 and i owe ~$110,00 and need to get $20000 quick. what you recommend?

 

[Squisher]

Originally posted by: Vic

Originally posted by: bob4432
i looked at my credit union and it said a line of credit is 9.5% with an * saying - *APR = Annual Percentage Rate. Quoted rates reflect the lowest rate available. Your individual loan rate will be based on your personal financial situation and previous credit performance. Rate subject to change without notice. my credit score is good-excellent and this will be a one time deal

Look elsewhere. 9.5% is not a good rate for a HELOC, even with poor credit.

I was thinking the same thing. I think my line of credit was like 4.5% when I was using it to purchase the Camaro. Couldn't be more than 6% now, could it?

 

[HappyPuppy]

I have a LOC on my house that I have never used and the APR is 4.5%. Your credit union is too high.

 

[BlackPear1]

Tax treatment of both loans would be the same (given your home's value and existing mortgage) so go for the cheapest option that meets your time requirements. I agree with others that the rates you've been quoted are too high. Try shopping some of the online lender comparisons. Good luck.

 

[bob4432]

my credit union is usually pretty good, we belong to 2 of them, i will call on monday to see why the one is so high and also call to see what the other one is. thanks all

 

[FlyLice]

Originally posted by: rpl318
Tax wise, they are both equal. Both are considered 2nd mortgages so the interest reductions work the same way. The line of credit is more convenient in that it is revolving. You don't have to use all of the funds at once and once you pay back what you owe, you can start all over again (without refinancing). The rates on these lines of credit are variable (typically based on the Prime rate + a margin). The standard equity loan is a fixed rate 2nd where you get all of the funds up front (which means you are charged interest on the entire amount immediately). The fixed rate 2nd gives you less flexibility in that you cannot reuse the equity without refinancing. The rates on the lines of credit are a little lower than the fixed 2nd right now but their rates are increasing. Just do your research and find out which product best fits your needs.

Do an equity line of credit. Make sure to CO-MINGLE your funds to ensure full deductability.