Is a HELOC right for you?

Did you know that if you are a homeowner, there is a high probability that you could possibly qualify for a Second Mortgage which is called the Home Equity Line of Credit or HELOC? So, you might be asking yourself, what is a HELOC? The answer is simple. A HELOC is a line of credit borrowed against the available equity of your home. Your home's equity is the difference between the appraised value of your home and your current mortgage balance. Depending on who your lender is, you can generally borrow up to 85 percent of the value of your home minus the amount you still owe. Also unique about a HELOC is that the terms are normally 5 to 30 years meaning that the payer would have access to funds for 10 years and then have 20 years to pay it back.

Now you might be thinking to yourself, all of this information is good, but what does it have to do with income taxes? Simple. With a HELOC, there is a possibility that the interest paid could be tax deductible. If you look further on the IRS website, it states that “for tax years 2018 through 2025, if home equity loans or lines of credit secured by your main home or second home are used to buy, build, or substantially improve the residence, interest you pay on the borrowed funds is classified as home acquisition debt and may be deductible, subject to certain dollar limitations. However, interest on the same debt used to pay personal living expenses, such as credit card debts, is not deductible. For tax years before 2018 and after 2025, for home equity loans or lines of credit secured by your main home or second home, interest you pay on the borrowed funds may be deductible, subject to certain dollar limitations, regardless of how you use the loan proceeds. For example, if you use a home equity loan or a line of credit to pay personal living expenses, such as credit card debts, you may be able to deduct the interest paid.”

Again, you might be thinking to yourself, if I own a home, would a HELOC be a better option for me than credit cards? The answer is it all depends. HELOC’s do offer tax benefits whereas credit cards do not. If anything, you are paying taxes on your credit cards which also includes high interest rates and fees plus if you are making a late payment that could also affect your FICO score.

If you would like to learn more our team can work with you to offer more specific advice and help with a year-round strategy to maximize your returns.