3 home equity myths busted: What owners should know now
Have you considered tapping into your home's equity? Chances are you have a few questions, but there's a problem. Myths are commonplace in the financial industry and they often skew the facts for those looking for solutions. The home equity space is no different. However, it's important that you understand the truth about home equity before you tap into yours.
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3 home equity myths debunked
Here are some of the most common home equity myths, along with their opposing truths:
Myth: You have to own your home for years to build up any equity
You don't have to own your home for any specific period of time before you can build equity. You may even have equity in your home the moment you leave the closing table.
Joelle Roberts of Florida Showcase Realty in Marianna, Florida explains, "Equity is simply defined as 'the market value of the property less the debt against it.'"
"It is possible to close on a house and immediately have equity in that property," Roberts says. "In a stable market, if you put 20% down when financing, you will instantly have 20% equity in that property."
Equity can also rise and fall with market conditions. Roberts explains that, "an upswing in the market" as much of the country has seen in the last two years, "will cause a rapid increase in property values and equity." So, even if you didn't have equity in your home on the day you purchased it, a rapid upswing in the market could mean you have meaningful equity in your home in a minimal amount of time.
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Myth: You can only use home equity loans for home repairs
When you access the equity in your home, you're tapping into your home's value. As such, lenders aren't concerned with how you use the money. Although many borrowers use home equity loans to cover the cost of home improvement, there are several other reasons to tap into these funds. Some of the most common include:
- Debt consolidation: Interest rates on home equity loans are typically far lower than rates on credit cards and other personal loans. As such, borrowers often use home equity loans to consolidate and reduce the cost of credit cards and other revolving debt.
- Healthcare costs: The cost of healthcare can be staggering. In many cases, borrowers tap into the equity in their homes to pay for deductibles, medications and more.
- Holiday expenses: Between gifts, family meals, travel and ancillary holiday needs like wrapping paper and decorations, the holiday season can get expensive. A home equity line of credit (HELOC) could give you access to the funds you need to make it through the season.
Myth: You can't deduct home equity loan or HELOC interest on your tax return
The interest you pay on your HELOC or home equity loan isn't always tax deductible, but it is under some circumstances. Your interest is tax deductible if you use the money you borrow to build onto or otherwise improve your home.
Dr. Alison Riley, CPA, owner of Sunshine State Tax and Accounting Services, explains further.
"Interest paid by individuals is generally not deductible for taxes, but there are several carve outs," Dr. Riley says. "One of those carve outs is the mortgage interest deduction on your main home or second home. The deduction is limited to interest on up to $750,000 of mortgage debt in total, unless you bought the home before 12/16/17, in which case the limit would be $1,000,000. These amounts are halved if you file married filing separately. This includes interest on any HELOC, the proceeds of which are used to buy, build, or improve the home."
Riley went on to explain, "this only becomes applicable if you itemize deductions," although she noted that owners should consult a tax professional for more information.
Perhaps this myth is where people get the misconception that you can only use equity loans and lines for home improvement expenses. Nonetheless, if you do plan to use your home's equity to improve your dwelling, there's an added tax incentive.
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The bottom line
The bottom line is simple. Widespread myths may seem fun, but they could limit access to important financial tools. Now that you know the truth about the myths above, home equity loans likely seem more effective than ever before. Consider tapping into yours to access the cash you need. Get started here today!
