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With so many credit options on the market, it can quickly become confusing trying to navigate which one is best for you. when Credit card And personal loan The two most popular types don’t always come with the best interest rates. Fortunately, homeowners with even minimal equity in their home can use that equity as a low-interest form of credit. It can take several forms but two are the most well known Home equity loan And Home Equity Lines of Credit (HELOCs).
Both access the equity that the homeowner has accumulated in their home to then be used as credit for major expenses such as home renovations and repair, emergency fixes, and more. As with all financial products and services, however, it helps to understand the nuances of home equity loans to get the most value. In this article, we’ll break down the answers to three important home equity loan questions homeowners ask.
If you think you could benefit from taking out a home equity loan, start exploring your options here.
Home equity loan questions to know
Here are three important questions homeowners should think about when applying for a home equity loan.
What will the money be for?
The potential uses for a home equity loan are limitless. They can be used to pay off (or pay off in full) debt, fund major expenses like weddings and college tuition, or even finance home repairs and renovations. It’s the latter category, however, where home equity loans are particularly favorable. Because interest is paid on these loans duty free If used for IRS-qualified reasons.
“Home equity loan interest and lines of credit are deductible only when the borrowed funds are used to purchase, construct or substantially improve the taxpayer’s home that secures the loan,” the IRS explains. “The loan must be secured by the taxpayer’s principal home or second home (eligible residence) and meet other requirements.
“Generally, you can deduct home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 8a. However, any interest from a home equity loan shown in Box 1 of Form 1098, or a line of credit or credit card loan secured by property, is not deductible if the proceeds are not used to purchase, construct or substantially improve a qualified home.”
Again, home equity loans can help finance many things, but if you know you need money to repair a home, this is probably your best bet because most other credit types won’t let you deduct the interest you pay during tax season.
Explore your home equity loan options here now to see what you qualify for.
When are you planning to apply?
Timing is everything – even when it comes to home equity loans. Ideally, you can apply When home values are high And the amount of equity in your home is substantial. So, if you live in a part of the country where home prices have risen in recent years Now it’s time to act. If you wait, and the economy turns bad, it can have a trickle-down effect on the value of your home, reducing what you can potentially withdraw.
And remember: home equity isn’t just what you paid on your mortgage, it’s also the value of your home at the time of application. So if you’ve paid off $50,000 of your principal and your home has gone up in value by $100,000, you have a total of $150,000 in equity – not just the initial $50,000. Be sure to apply if the value is higher otherwise you’ll be limited to that first image.
How soon will the money be needed?
A home equity loan can be a viable option to pursue if you plan to use the money in the near future. If you need funds for an urgent emergency (think a major home repair like a new roof) you won’t be well served by going this route.
As mentioned, your equity is determined by how much you’ve paid off your mortgage and how much your home is currently worth on the market. You need to evaluate your home to determine the next figure. It can take weeks (if not more than a month) to set it up, complete it, and get the results in the hands of the lender you’re using. While this may not be a factor for a project to be put off, it may be disqualifying for homeowners with more pressing needs.
Bottom line
Home equity loans provide low interest credit options for homeowners to use as they see fit. Prospective borrowers must first understand why they need the money because this type of credit has unique tax advantages when used for IRS-qualified reasons. Homeowners should also be as careful as possible during their application to get as much equity out of their home as possible. Finally, they should understand that it takes several weeks for funds to be disbursed from a home equity loan so if they need cash immediately, they may be better off going the personal loan or credit card route instead.
Learn more about your home equity loan options here now or check your local offers in the table below
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