When is the best time to borrow home equity? The answer may surprise you.
Interest rates are high and homeowners are staying put. With mortgage rates now in the 6% to 7% range, the options for prospective homeowners to purchase a new home or current owners to refinance their existing mortgage are limited. In this environment, many homeowners may instead be considering renovating or fixing the houses they live in.
In addition to making your home more comfortable and attractive, a significant home improvement could be a boost to your overall home value. To finance these repairs, homeowners should strongly consider using their existing home equity. In fact, arguably the best time to borrow your home equity is when you need to fix up your home.
You can explore your home equity options here now to learn more.
When is the best time to borrow home equity?
It may seem counterintuitive to use your home equity when making home repairs but, generally, the best time to borrow from your home is when you're planning on putting it back in with a major home improvement, renovation or repair. The reason? Unlike other options (like credit cards and personal loans) you'll generally be able to deduct the interest you pay on a home equity loan or a home equity line of credit (HELOC) when you file your taxes for the year the loan was used.
"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 says. "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."
While there are multiple great times to borrow from your home equity, it's arguably best when you know you'll be utilizing it to fix up your home. Considering the tax deduction — and the fact that interest rates on home equity loans are lower than credit cards and personal loans — this may be the best way to pay for your next kitchen remodel or for a new roof.
Check your home equity loan options here to see how much you could borrow.
How to use home equity
There are multiple ways homeowners can use their equity to work on their homes. Here are three popular options:
A home equity loan
A home equity loan allows the homeowner to borrow a lump sum from their accumulated equity. Rates for home equity loans are fixed, allowing the homeowner to more effectively budget each month. Most lenders will allow the borrower to withdraw 80% to 85% of their existing equity.
A HELOC
A HELOC operates similarly to a home equity loan but instead of giving the borrower one sum of money upfront, it will instead function as a revolving line of credit (like a credit card would). This can be beneficial because borrowers will only have to pay interest on the amount they've used to date — not the full amount they applied for, as they would with a home equity loan. That said, HELOC rates are usually variable so the low rate you get when you're approved may not stay that low long-term.
Cash-out refinancing
Cash-out refinancing involves taking out a new mortgage loan for an amount larger than what you currently owe your lender. You would then use the new loan to pay off the old one and take the difference for yourself as cash. Depending on how much you currently owe on your mortgage — and how much you apply for in a new loan — you could secure a substantial amount of money. Just be sure to check rates first to ensure that this is the best option for you.
The bottom line
While there are multiple great times to take out a HELOC or home equity loan, arguably the best is when you need it to make home repairs and renovations. If you use the money for these projects you'll be able to deduct the interest you paid for the tax year you used it, making it a preferable alternative in an otherwise discouraging rate environment.
