What Happens to My Homestead Exemption If I'm Not on a Loan?

Your homestead exemption generally protects a portion of your interest in your home from some creditors. In some states, filing a homestead exemption may also slightly reduce your property taxes. Those two benefits accrue to you whether you owe a lot on your house, a little or nothing. As such, your homestead exemption won't change, even if your loan does.

Homestead Exemption History

Before America was a country, colonial laws sometimes protected a person's tools from being seized by creditors. In the 19th century, some states started to offer the same protection to family homesteads. While the process started in 1829 in Texas, before it was a state, it quickly expanded throughout the country and, by 1864, over 30 different states and territories offered homestead protection. While the details of the homestead protections vary from state to state, their basic terms were and still are the same -- a portion of a family's main home's equity can be protected from seizure by creditors.

Homestead Protections

When you file a homestead exemption with your county, a portion of your home's equity gets protected from creditors. When you file bankruptcy, the equity that is covered by the homestead exemption essentially gets subtracted from your total assets. For example, if you have a $350,000 house and owe $300,000 on it, but you live in Delaware, which gives you a $125,000 homestead exemption, your $50,000 in equity is sheltered from being used to pay off your debts.

Homestead Property Taxes

Some states also give a property tax reduction on homestead property. When you file for the exemption, those states subtract a homestead allowance from your property's assessed value. For example, $25,000 of the value of a homestead is exempted from tax in Florida. The city of Philadelphia exempts $30,000 in value, while the state of Minnesota exempts the first 40 percent of the first $76,000 of value, but reduces the exemption by 9 percent of any value over $76,000.

Homesteads and Mortgages

If you ever take out a loan against your homestead, you could end up subject to one of the homestead's drawbacks. While your homestead exemption protects you from most of your creditors, it doesn't protect you from your mortgage lender. Your lender's security interest in your property comes before your homestead protections so if you don't pay them, they can still foreclose and sell your house.