Question

Sean and Amy Anderson have a home with an appraised value of $210,000 and a mortgage balance of only $105,000. Given that an S&L is willing to lend money at a loan-to-value ratio of 80%, how big a home equity credit line can Sean and Amy obtain? $ 42,000 How much, if any, of this line would qualify as tax-deductible interest if their house originally cost $100,000?

Answer 1

Appraised value = 210,000

Mortgage balance = 105,000

Home equity = appraised value - mortgage balance = 210,000-105,000 = 105,000

Loan to value ratio = 105,000/210,000 = 50%

Remaining LTV ratio = 80% - 50% = 30%

Additional which it can borrow = 30%*home equity = 31,500

Home equity credit line = 31,500*2 = 63,000

As per IRS, "The Tax Cuts and Jobs Act of 2017, enacted Dec. 22, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan." So, the HELOC taken by the Anderson's would not be eligible for tax-deductible interest unless they plan to do substantial work on the house.