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The 3rd Tax Advantage To Buying A House - Tax Free Borrowing

By Kate Ford

Republish: EasyPublish™ Published: 24Nov2008 Word count: 872 Viewed: 405 time(s) Get Free Content For Your Site

The further you go in life, the more you're starting to feel like buying a house certainly provides serious tax shelter advantages.

Rare thinking people like you already know that the ability to borrow by taking advantage of the equity in your home is an important one. If you live in the United States, buying a house should be a priority of your personal financial plan because of the opportunity to shelter income from taxes.

Tip number one already discussed how expenses related to home ownership can be tax deductible. Two large deductions of owing a home are the mortgage interest deduction and the property tax deduction. It is easy to look at these deductions as the government helping to pay for the cost of owing or buying a house.

Remember the second tax benefit of owning a home is the tax-free sale. Individuals may be able to exclude up to $250,000 from tax liability due to the sale of a house or up to $500,000 if a married couple. By meeting the ownership test and the use test, it is possible to enjoy such an incredible benefit. The second benefit alone is a significant reason a financial plan should include buying a house.

This third tip is amazing. The next benefit you can enjoy from buying a house is the ability to borrow tax-free against home equity without having to sell your house.

Accordingly, when your house appreciates in value you create equity in your home over and above the original loan amount for the mortgage. Over the years you also pay down the mortgage, freeing up more equity. You are then free to borrow against that equity.

Here is an example. Suppose you bought your home for $200,000 using a mortgage of $160,000. Since you purchased, the house has appreciated to $350,000 while you have paid down the balance to $150,000. Potentially you have equity of $200,000 that you may borrow against.

Also notice there are several ways to do this that you should discuss with your financial advisers and mortgage lender. You may choose to refinance the entire amount of the mortgage balance plus cash out, taking advantage of any additional equity you want to borrow against. When interest rates are low, your refinanced mortgage payment may even be less than what you originally borrowed.

Along these same lines there is another method to access your equity yet not have to take it in one lump sum. You can request a line of credit from your bank. The equity from your home becomes the collateral for your loan.

Without a doubt a line of credit loan has several advantages. You have the money available when you need it but don't have pay interest on it if you don't use it. Any costs to establish a line of credit are usually small versus refinancing which usually includes origination fees and closing costs.

Finally, a line of credit, sometimes called an LOC, can be repaid easily but you still have the option of accessing the LOC again without a new application being formally submitted. The costs are also significantly lower versus a personal loan or credit card.

Other methods include applying for a 2nd mortgage sometimes referred to as an equity loan or home improvement loan. These loans mostly have specific terms for the amount of time to pay back the loan and generally have a fixed interest rate. So be sure you understand how soon the 2nd mortgage is to be repaid, the amount of monthly payments, if there is a balloon payment at the end of the term, and whether the interest rate is fixed or adjustable.

This advice applies to any mortgage whether it for buying a house, refinancing, or obtaining a line of credit, or equity 2nd.

Although you can borrow against your home tax free that doesn't mean it is cost free. Banks are in the business of making money as are all mortgage lenders. Whether you decide to refinance your 1st mortgage entirely, apply for a line of credit, or acquire a 2nd mortgage, you must be sure you understand completely what closing costs will be incurred, what is the period for the loan to be repaid, and what interest rate you will receive. In addition you must know if the interest rate and payment can adjust and if so, how much and how often.

Before ending this article, focus on one other additional factor. When getting any type of mortgage for buying a house or refinancing, you must inquire if the home loan is going to have a pre-payment penalty.

A pre-payment penalty is a stipulation by the lender that does not allow you to repay the mortgage prior to a certain date without penalty. It usually lasts from one to three years. Whether or not you accept a pre-payment penalty as part of the terms of your mortgage may or may not be important to you. However it is important that you are aware of it especially if you have plans to pay the loan off early.

Regarding tax implications, it is always recommended that you consult a qualified financial adviser.

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