Question

Sean and Amy Anderson have a home with an appraised value of $220,000 and a mortgage balance of only $110,000.

1. Given that an S&L is willing to lend money at a loan-to-value ratio of 75%, how big a home equity credit line can Sean and Amy obtain?
   $   
   
2. How much, if any, of this line would qualify as tax-deductible interest if their house originally cost $100,000?
   $   

Answer 1

(a):

Current appraised value	220,000.00
First mortgage balance	110,000.00
Remaining value available for loan	110,000.00

If loan to equity is limited to 75%, most that could be loan is 75% of $220,000 = 0.75*220,000 = $165,000

Total available	165,000.00
First mortgage balance	110,000.00
Remaining value available for loan	55,000.00

(b): The interest on the entire home equity loan of either $110,000 or $55,000 may be deducted as an itemized deduction. The deductible interest in limited to the interest on a first mortgage of a maximum $1,000,000 from the acquisition of up to two homes. The deductible interest on home equity loan is limited to principal of $100,000. So if the acquisition interest was $100,000, the interest on both the first mortgage of $110,000 and the home equity loan of either $55,000 or $110,000 would be deductible.