Fact vs. fiction? Myths about home equity loans

One of the benefits of buying a home is that you can build equity in it and tap into that equity to pay for a major kitchen remodel, eliminate your high-interest credit card debt, or even help cover your children’s college tuition.

But what exactly is equity, and how can you use it?

Home equity is the difference between your home’s market value and the current mortgage balance. According to Statista, homeowners in 2020 held $21.1 trillion in total home equity in the United States. With a home equity, homeowners can meet long and short-term goals like consolidating debt or financing improvements.

But what can you truly do with a home equity? Let’s break some of the biggest myths.

Myth No. 1

Home equity is only used for improvements and repairs.

Fact: Once a homeowner receives a home equity loan, the borrower is free to use the funds for anything. Though many borrowers choose to finance large expenses, such as home improvements and repairs, education, and debt consolidation, some use their home equity to fund business ventures, vacations, and even offsetting the costs of retirement.

Myth No. 2

Home equity loans are like credit cards and personal loans.

Fact: Although home equity loans are similar to other lending options like credit cards and personal loans, they are different. Home equity loans are secured debt, while credit cards and personal loans are unsecured.

An asset or collateral like a home backs secured loans. Because home equity loans are secured, the interest rates are typically lower than credit cards and personal loans. Many homeowners with high-interest credit cards may use their home equity to consolidate and pay down their debt.

Myth No. 3

The process to take out a home equity is long, requiring a trip to the bank.

Fact: Home equity lending has significantly changed in recent years, making it easier and faster for homeowners to get a home equity. Contact a Branch Banking Representative for more details on Adirondack Bank’s home equity loans.

Myth No. 4

Home equity loans are no longer tax deductible.

Fact: The Tax Cuts and Jobs Act of 2017 placed new restrictions on home mortgages. As a result, deductions for interest paid on home equity loans were restricted, and in some cases suspended from 2018 to 2026. But according to the IRS, interest on a home equity loan is deductible if you use the funds for renovations to your home – the phrase is “buy, build, or substantially improve.”

To be deductible, the money must be spent on the property whose equity is the source of the loan.

You may be able to deduct interest paid on your home equity; however, to determine eligibility, consult a tax advisor to assist you.

Myth No. 5

Home equity is a costly financial solution when adding in fees and closing costs.

Fact: Many home equity loans come with hidden costs such as title fees, appraisal fees, closing costs and prepayment penalties.

Adirondack Bank makes it easy to convert the equity in your home into a useful resource for things you need and want today. At Adirondack Bank, there are no application or closing costs; however, some restrictions may apply. All borrowers are required to pay a mortgage tax. With home equity loans above $250,000, the borrower must pay the title insurance. Contact your Branch Banking Representative for full details.

Myth No. 6

Borrowers can use a home equity loan to access the full amount on their home’s equity.

Fact: Borrowers can access a significant portion of their equity for a home equity loan; however, the amount a homeowner can borrow is limited to a percentage of the total equity in your home. Other factors – such as credit history, income and debt-to-income ratio – control the total amount of your loan. Contact Adirondack Bank for full details about home equity loan requirements.

Although in some cases it is possible to borrow more money, many experts advise homeowners to avoid taking out the maximum amount and keep a cushion to protect their home should the prices fluctuate over time.

Myth No. 7

Home equity accrues over years, so you must own your home for several years before using your equity.

Fact: Depending on the mortgage type, homeowners may have equity after they make their down payment. If the value of your home remains the same or increases and is funded with a traditional loan, your equity will grow with each mortgage payment. On the other hand, some borrowers take out interest-only loans, meaning for the first several years, they pay only interest on their mortgage. This means they aren’t paying down the principal and not increasing the equity. If the home price falls, so does the equity. If it falls drastically, the homeowner owes more on the home than it’s worth.

If you’re considering a home equity loan with Adirondack Bank, contact a Branch Banking Representative for more details.

The information in this article was obtained from various sources not associated with Adirondack Bank. While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. Adirondack Bank is not responsible for, and does not endorse or approve, either implicitly or explicitly, the information provided or the content of any third-party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. Adirondack Bank makes no guarantees of results from use of this information.