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 Tax deductibility of home equity loan interest expense
  Is a balloon home equity loan a bad decision?
By the EchoBay Loans Expert
 Tax deductibility of home equity loan interest expense
Dear EchoBay Expert: Can the interest from home equity loans be deducted on my tax return?

Dear Loyal Reader: Yes, but there are certain exceptions. First, you can only deduct interest on loans that do not exceed the value of your home. If your home is worth $200,000 and you owe $215,000 in total loans (whether it is your first mortgage or home equity loans), you can only deduct interest for the first $200,000.

Second, you can generally only deduct interest on home equity loans of $100,000 or less. This applies no matter how many home equity loans you have or how many homes they are secured against. The IRS only allows interest deduction for the first $100,000.

One of the most appealing reasons of the home equity loan is that the loan purpose doesn't have to have any thing to do with your home but you can still deduct the interest as if it did. Does your daughter want to go to Harvard? In most cases, $100,000 in tuition expense received through your home equity loan can be deducted on your taxes.

But if you decide to use your home equity loan to improve your home, you can generally disregard the $100,000 rule. When you use the money to make substantial improvements to your home, the IRS views it the same as first mortgage debt.

This means you can deduct up to $1,000,000.As you can see, the rules for deduction depend on your situation. As you've heard many times before - consult your tax advisor before you take the leap.

 Is a balloon home equity loan a bad decision?
Dear EchoBay Expert: I owe over $10,000 on my credit cards and want to get cash from my house to pay off these bills. Is a balloon home equity loan my best option to have the lowest monthly payments?

Dear Loyal Reader: A balloon home equity loan can be your best option to have the lowest monthly payments but there are many drawbacks to this type of loan. First, be aware that your credit card debt is unsecured. This means that if you don't pay, the lender will write off your debt and destroy your credit rating.

While that is no picnic, it is even worse to not be able to make payments when you have tied your credit card debt into your home and risk foreclosure. That being said, a balloon home equity loan usually features interest only payments or interest plus a small portion of principal. In all likelihood at the end of your term, you are left with the same loan balance you originally borrowed.

The problem with this is that the entire loan amount will be due at once. Imagine paying only a couple of hundred dollars a month and then getting hit with a $20,000 bill that's due within ten days. Not too many people can handle that. Your options would include refinancing, liquidating assets to pay off the loan or selling your home to pay off the loan.

Many take out this type of loan thinking that they will just refinance the debt at the end of the term. But a lot can happen during that time period. If for some reason you can't get approved for a loan, whether it's because your credit has deteriorated or interest rates have skyrocketed and you can't afford the payments, you will risk losing your home.

Before you take out this type of loan, particularly to pay off credit card debt, you need to be positive you can sell your house if you had to and that you can make enough money to pay off all of the associated debt.

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