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The home you own isn't just a roof over your head. It can be
collateral for a loan.
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| A home equity loan is like a
second mortgage,
secured by your equity
in your home. The amount is based on the market value of the home, less what you owe on your first
mortgage or other loans on the home.
You can use a loan secured by your home to provide money for investments
or for your business, to pay college expenses, or to cover renovations to the property.
The risk of home equity loans is putting up your home as security. You can lose your home if you don't keep up with
the loan payments even if you continue to pay a first mortgage.
That's the reason it's rarely a good idea to use a home equity loan to pay for non-essential expenses.
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REFINANCING YOUR MORTGAGE
If you refinance your mortgage, you take a new loan and use some or all of the amount you
borrow to pay off what you owe. You might consider refinancing if the interest rates
on new loans are less than the rate you are currently paying. One rule of thumb
is that it pays to refinance if the new rate is at least two percentage points lower
than your current rate. But you may benefit even if the difference is smaller.
Before you refinance, you'll want to add the expense of making the change —
including a new title search and title insurance, attorney's fees, credit checks,
and other costs. Then you divide that total by the amount you'll save on each
new mortgage payment. The answer tells you how many months you'll have to live
in your home before you break even and begin to save money.
You might also consider changing the term
of your mortgage when you refinance. If you can afford to pay off your
loan in 15 years rather than 30, for example, you can save a substantial amount of money.
The rate on a shorter loan is often lower, but the monthly payments are higher.
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SELLING YOUR HOME
You also qualify for a tax break when you sell your home if it has been your primary residence
for at least two of the five years before the sale and you haven't sold a different
home within the past two years. If the home has been your primary residence for
the full five years, you can include up to $250,000 in capital gains if you are
single, and $500,000 if you are married and file a joint return. However, you must
reduce the exclusion on a percentage basis, for any period during the five years
that the property was not your primary residence. For a copy of IRS Publication
523 "Selling Your Home", visit www.irs.gov.
Any gain above those amounts is taxed at your long-term capital gains rate if you've owned the property
for more than a year. However, if you sell at a loss, it is considered a personal, not a
capital loss. That means you
can't use the loss to reduce taxes you may owe on other capital gains or on regular income.
Your cost basis includes not only the purchase price but amounts you spent over the years to make improvements,
plus the costs of selling the home. That's one reason why it's important to keep good records while you own
the property. Routine maintenance expenses, like mowing the lawn or painting the kitchen, don't count toward
increasing your basis, but many
other costs do. Remember, though, that your basis can also be decreased if you've received certain subsidies or
credits, got an insurance payment
to cover losses, or took a depreciation for using part of your home as an office. Check IRS Publication 17
and talk to your tax adviser.
One complication may occur if you sold a home before 1997 and rolled any profit from the sale into your current
home. You should read chapter 3 in Publication 523 and talk to your tax adviser.
And there may be exceptions to the requirement that you live in your home for at least two of the five years before
you sell. If you're disabled, in military service, or have some other good reason for selling, it pays to check.
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