What kinds of investments am I allowed to take out a home equity loan for?

Question

...just trying to figure out what the rules are for getting equity out of my house and what I can spend that money on legally. Thanks in advance!

Answer 1

You can use the proceeds from a home equity loan for any purpose you like, investments or otherwise. It's your money. There are no restrictions.

However, there are rules regarding reporting the interest on the loan as a tax deduction when you itemize. Whether the interest is fully deductible might depend on how you spend the money. Points paid on the loan are considered pre-paid interest and are also deductible.

If you use the proceeds (1 million dollars or less) to buy, build, or improve your home, the interest is fully deductible. If you use the proceeds for other purposes, you are allowed to deduct the interest on the loan amount up to $100,000, as long as the amount is equal or less than the Fair Market Value of your home minus any existing mortgages.

IRS Publication 936 goes into more detail. Link below:

"Fully deductible interest. In most cases, you will be able to deduct all of your home mortgage interest. Whether it is all deductible depends on the date you took out the mortgage, the amount of the mortgage, and your use of its 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 2006 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 2006 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).

The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home.

See Part II for more detailed definitions of grandfathered, home acquisition, and home equity debt."


If you have a home ofice, or use your home partially for business, check IRS publication 535 on how to allocate the interest as a business related deduction.

It's not unusual to find mortgage companies willing to loan up to 125% Total Loan to Fair Market Value, as long as you qualify as a borrower.

Answer 2

So why would anybody want to take out a home equity loan, just to have money to blow? Sounds very stupid to me. I think you need to do a budget, learn to live on less than you make, get out of debt, then you will have extra money.

Debt is Dumb!

Answer 3

There are no restrictions on what you use the money for as far as the bank is concerned. You could blow it on booze and hookers in Nevada for all they care.