home equity

Getting a Loan 101

Scarsdale tax preparer Paul Herman of Herman & Company CPA’s has all the answers to your personal finance questions! 

What are the advantages of prepaying a mortgage, and should I if I can? Tips from Scarsdale accountant on getting a loan

It is highly recommended that you prepay as much of your mortgage as possible every month, which will drastically reduce the total amount that you pay.

However there are times where this could be disadvantageous.

If you are in a situation where you don’t have funds to cover three to six months of expenses, it is recommended that you save that amount before you pay additional amounts on your mortgage.

If you have a large amount of credit card debt, over the long run, you will save more money by knocking down those high interest loans first.

There also may be times where that money would be more wisely invested in the market, depending on the expected rate of return versus how much you would save in early payments.

 Should I refinance?

In order to refinance your home, the current market rate should be at least 2 percentage points lower than what you are paying on your mortgage. Speak with a lender to see what rate you may be able to get. Remember to factor in costs like appraisals, points from the lender, and others, which may not be apparent in your initial price assessment.

After assessing that cost, get a quote of what your total payment would be after refinancing. The simplest way to find out how long it will take to recover the refinancing costs will be to divide your closing costs by the monthly savings with your new monthly payment.

Also take into consideration how long you plan on holding your home. It may not make sense to refinance the home if you plan on selling in the near future.

▼ Does borrowing against my securities make sense?

This could be a low-cost option for borrowing but there is some risk involved. Deductions are not allowed for the interest unless that loan is used to invest in a business.

▼ Can a Home Equity Line of Credit be beneficial?

A home equity line of credit is a form of credit which allows you to borrow and use your home as collateral. Since for many, a home is their greatest asset, they tend to use these sorts of credit lines for large things like a college education for their children, medical expenses or for large unexpected bills as opposed to luxuries or day to day expenses.

After receiving a home equity line, one is approved for an amount of credit, or a maximum that may be borrowed at any given time for the duration of the plan.

On many occasions a lender will set a credit limit on a home equity loan by setting a percentage, after considering the amount of the appraised value of the home and the amount owed on the home.

After the line of credit is approved, you will be able to borrow up to the set limit, usually in the form of checks. In some instances a borrower may be given credit cards to utilize, sometimes with minimum spending requirements.

▼ What costs are associated?

The costs associated with getting a home equity loan are basically the same as a refinance.

  • Appraisal
  • A non-refundable application fee
  • Up front points, which equal one percent of the entire credit limit
  • Closing costs, which are the same as the closing costs you would pay upon purchasing a home
  • Yearly fees and the possibility a transaction fee per draw

▼ How can you lock in an interest rate?

After choosing a lender, you may be quoted a rate, which may “float” until the actual closing, meaning that it is not guaranteed. With a lock-in you are guaranteed that the interest rate will not change before your closing. You may want to ask for an agreement that ensures that your rate is capped, but allows you to take advantage of a lower rate if the rate lowers before your close.

There is usually a time limit that a lender will put on this guarantee, and if you don’t close before that time, they no longer have to honor that lock-in. It is recommended that you stay in close contact with your loan officer during the process to ensure that you are able to close in a timely manner and get the locked-in rate.

▼ What disclosures should I get from my lender?

The lender is obligated by the Truth in Lending Act to provide you with a written statement with a list of all of the costs associated with the loan and the terms of financing. This statement must be delivered to you before the settlement.

If you want to rescind the loan, you may do so within 3 business days of the receipt of the Truth in Lending paperwork, receipt of cancellation notice, or your settlement, whichever was the most recent.

You will want to carefully review the disclosure that you are given before you sign. This disclosure will have all of the pertinent information about your loan, the finance charge, the amount financed, the payment schedule and the APR.

▼ How does a reverse mortgage work?

A reverse mortgage is a way for you to take advantage of some of the equity that is currently tied up in your home. A reverse mortgage works in the same manner as a normal one, reversed, and the homeowner is paid monthly versus having to pay. The major difference between this and a home equity loan is that you aren’t required to pay anything back to the lender as long as your retain ownership of the home.

The major benefit of a reverse mortgage is that it allows homeowners to take advantage of some of the equity that they have built up in their homes without the burden of having to pay it back in monthly payments. This could be used to supplement income, defray the cost of medical aid, pay for college education, stop a foreclosure or to make it possible to retire.

When the homeowner sells the home or dies, the home must be paid off and, if sold, the remainder of equity is given to its rightful heirs.

 Is any loan interest tax deductible?

These interests are deductible, some fully, some partially:

  • Education-related interest
  • Business interest
  • Investment interest
  • Mortgage interest

▼ Can you stop paying Private Mortgage Insurance (PMI)?

Usually people that make a down payment of less than 20% are required to pay private mortgage insurance by their lender. Once you reach 20% equity, PMI is cancelled, and any money accrued in your escrow account towards it will be credited to you.

Our Scarsdale tax preparers at Herman & Company CPA’s are here for all your financial needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Scarsdale NY, Larchmont NY, Chappaqua NY, Dobbs Ferry NY, Mamaroneck NY, Purchase NY and beyond.

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Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.