1/4/2009
Sunday morning

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This is a very popular technique to avoid PMI. I had 10% down on my loan, and took out a home equity to pay donw my mortgage below the 80% level. I know of folks who have arranged for a home equity loan to be part of the closing to avoid PMI. That is here in Minneasota...I have no idea if it varies by state. I would assume, however, that you still need to be able to qualify with the additional payments. This would seem to work best for folks who are buying less than the maximum house they are allowed to own.
It is incumbent upon a debtor to keep in contact with their lender and to make sure payments remain current on home and car notes. Otherwise, the lender may well take action to foreclose/repossess once the BK case is closed.
The interest on non acquisition debt, like home equity loans, second mortgages, etc, are only deductible up to $100,0000 (of debt). So if you have a home worth $500,000 and you take out a $200,000 home equity debt, only the interest on $100,000 is deductible.
There is another bad reason for taking this type of loan besides the high interest rate and the risk of losing your home: If the loan is in excess of the homes fair market value and is not used to buy, build, or substantially improve your home, it is likely that you will not be able to deduct the loan as home interest.
I have a client who wants to purchase rental property using his home equity. The loan will be secured by his personal residence. I am aware of the $100,000 limit on home equity loans. I have read that the interest tracing rules do not apply to home equity loans. The rental property will be rented to his corporation.
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