3 things to know about HELOCs
Homeowners exploring their credit options should strongly consider bypassing credit cards and personal loans and instead turn to their biggest investment: their own home. By utilizing the equity they've built in their home via a home equity loan or a home equity line of credit (HELOC), they can put themselves in the running for lower interest rates and a potential tax deduction at the end of the year.
With a HELOC, you'll apply for (and hopefully be approved for) a specific amount of credit based on the equity you have in your home at the time of the application. Lenders generally want you to have at least 15% to 20% equity in the home when you apply, but different institutions may have different requirements.
As with all financial products and services, it pays to understand the intricacies before signing on the dotted line. While HELOCs are generally easy to use and apply for, there are still some considerations to take into account to make a fully informed decision. We will explore three of these items below.
If you think you could benefit from taking out a HELOC, start exploring your options online.
3 things to know about HELOCs
Here are three useful things to know about HELOCs.
You don't have to use your current lender
You may think that if you're accessing your current home equity, you must use the lender that owns your mortgage, but that's not always the case. There are many banks and lending institutions that would be happy to have your business, and they may be willing to offer you a lower interest rate than your existing lender would. That said, if your current lender knows you're shopping around, they may try to keep your business by offering you competitive rates and terms.
Just make sure to do your research and shop around before committing. That way, you can ensure you get the best deal and lowest rate out there.
Start shopping HELOC offers online today to see what you're eligible for.
Interest may be tax-deductible
If you're looking for a credit option you can deduct from your taxes, a HELOC may be for you. If you use it for IRS-approved home repairs and improvements, you can potentially deduct the interest you paid during the year you used it when you file your annual return.
"Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer's home that secures the loan," the IRS says. "The loan must be secured by the taxpayer's main home or second home (qualified residence), and meet other requirements.
"Generally, you can deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 8a," the IRS goes on to say. "However, any interest showing in box 1 of Form 1098 from a home equity loan, or a line of credit or credit card loan secured by the property, is not deductible if the proceeds were not used to buy, build, or substantially improve a qualified home."
Rates come in fixed and variable options
HELOCs can have fixed or variable rates. A fixed rate is beneficial if you initially secure the HELOC for a low amount. A variable rate may be better if the rate is likely to drop in the future. It really depends on your financial situation and what rate is offered at the time you apply. Just go into the process clear-eyed, knowing that if you get a low variable rate, it may not stay that low for very long.
The bottom line
HELOCs can be a cost-effective and valuable way for homeowners to access funding at low interest rates.
As with most financial products and services, it pays to know the ins and outs before signing on the dotted line. For HELOCs, this means you don't necessarily need to use your current mortgage lender to access your home's equity. And if you use a HELOC to make major home repairs or renovations, you may be able to deduct the interest you paid when you file your tax return. Just be aware that HELOC rates come in both fixed and variable options. So make sure you know which version will be best - and most affordable - for your situation.
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