HELOCs are MORTGAGES folks!

[disneysteve]

I was listening to Suze Orman and heard a caller say that they own their home outright with no mortgage but then went on to say that they had a $50,000 HELOC.

It's disturbing to hear how many people don't think of a home equity loan or line of credit as being the same as a mortgage. Sorry folks, but you don't own your home free and clear if you have a HEL/HELOC.

[bjl584]

The sad thing is that a HELOC is worse than a mortgage because the rate is often variable.

[disneysteve]

The sad thing is that a HELOC is worse than a mortgage because the rate is often variable.

Suze made sure to point that out.

[krantcents]

I agree it is a mortgage/liability, but only if you have a balance. I have a $100,000 HELOC, but it has a zero balance. I have a very small mortgage and will be paid off in less than 3 years. I view the HELOC as a safety net. I would only use it for short term (repay in less than 12 months) borrowing. My home is worth $5-600K and that is too big an asset to just let sit. Just a different perspective.

[rogers]

Mortgage

You can choose to have an adjustable rate mortgage or a fixed rate mortgage.

[ua_guy]

I, too, am under the assumption that "owning a home outright" means there are no liens or mortgages against the property.

I think the statement that HELOCs are mortgages isn't absolute, kind of a blurry line. Do the lenders have right to the property on default? Yes, but they are usually secondary and it's not always in their best interest to foreclose. That doesn't mean they won't. But the repayment terms, interest rate structure, etc is unlike a primary traditional mortgage.

Would a HELOC be attractive to someone with means, and substantial equity in their home? I couldn't imagine so, but I might be wrong there...Thoughts?

[BuckyBadger]

A home equity loan is definitely a mortgage-type debt.

A home equity line of credit is not, unless it is used. I consider it like a credit card with a high limit. If you aren't using it, it's not a debt.

We've always had HELOCs set up on homes that we've had a lot of equity in. There's no down side, and it's nice to know that it's there if necessary. Should you decide to do a home improvement or buy a big-ticket item, it's a good source of funds in a low interest rate environment when you might not want to tap other investment resources. Plus, the interest is tax deductible. I consider it like a secondary emergency fund - not as guaranteed as cash in the bank, but nice to know it's there.

So no, I don't consider an unused HELOC to be a mortgage. It's just what it says it is - a line of credit.

[disneysteve]

So no, I don't consider an unused HELOC to be a mortgage.

Just to be clear, I don't consider a HELOC with a zero balance to be a problem either. That's not what I was talking about.

[bjl584]

Just to be clear, I don't consider a HELOC with a zero balance to be a problem either. That's not what I was talking about.

A HELOC with a zero balance is about the same as a credit card with a zero balance. It's nothing to worry about.

[HappySaver]

Plus, the interest is tax deductible.

This is not correct.

The interest on a HELOC is tax-deductible only if it was taken out as "home acquisition debt". In other words, you took out the HELOC to fund the property purchase or refinance the mortgage.

If you take out money from a HELOC to remodel or buy a car, the interest on that portion of the debt is not tax deductible.

[BuckyBadger]

This is not correct.

The interest on a HELOC is tax-deductible only if it was taken out as "home acquisition debt". In other words, you took out the HELOC to fund the property purchase or refinance the mortgage.

If you take out money from a HELOC to remodel or buy a car, the interest on that portion of the debt is not tax deductible.

I believe that what you are saying is incorrect.

You can deduct interest on up to a $1,000,000 HELOC if it's for "home acquisition debt," such as improving your home. You can still deduct interest on other debt paid with a HELOC, called "home equity debt," there's just a lower limit of $100,000.

From the IRS:

Fully deductible interest.

In most cases, you can deduct all of your home mortgage interest. How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds.

If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category.) If one or more of your mortgages does not fit into any of these categories, use Part II of this publication to figure the amount of interest you can deduct.

The three categories are as follows.

Mortgages you took out on or before October 13, 1987 (called grandfathered debt).

Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2013 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately).

Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2013 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2).

[Weird Tolkienish Figure]

Just to be clear, I don't consider a HELOC with a zero balance to be a problem either. That's not what I was talking about.

Really? You did say it was a HELOC.

[HappySaver]

My bad. You're correct, BB. I forgot about the $100,000 threshold.