3 things to know about HELOCs

Homeowners exploring their credit options should strongly consider foreclosure. credit card And Personal Loans And instead turn to their biggest investment – ​​their own home. Using the equity they have built up in their home through 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 possible tax cut at the end of the year.

With a HELOC, you’ll apply (and hopefully get approved) for a certain amount of credit based on the equity in your home at the time of application. Lenders generally want you to have at least 15% to 20% equity in the home when you apply, but each institution may have different requirements.

As with all financial products and services, however, 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 make a fully informed decision. We will explore three of these items below.

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3 Things to Know About HELOCs

Here are three useful things to know about HELOCs.

You don’t have to use your existing lender.

You might think that if you’re accessing your existing home equity you automatically have to use the lender that owns your mortgage, but that’s not always the case. There are many banks and lending institutions that will appreciate your business and may be willing to offer you a lower interest rate than your current lender. That said, if your current lender knows you’re shopping around, they may be more likely to keep your business by offering you competitive rates and terms.

Just be sure to do your research and shop around before committing. This way you can make sure you get the best deal and the lowest rate.

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Interest may be tax deductible.

If you’re looking for a credit option that you can deduct on your taxes, a HELOC may be for you. If you use it for IRS-approved home repairs and improvements, you likely can. Deduct the interest you have paid. You use it when you file your annual return during the year.

“Interest on home equity loans and lines of credit is deductible only if the borrowed funds are used to purchase, construct, or substantially improve the taxpayer’s home that secures the loan.” The IRS says that. “The loan must be secured by the taxpayer’s main home or second home (qualifying residence), and other requirements must be met.

“Generally, you can deduct home mortgage interest and points you reported on Schedule A (Form 1040), line 8a of Form 1098,” the IRS continues. “However, any interest shown in Box 1 of Form 1098 from a home equity loan, or line of credit or credit card debt secured by property, is not deductible if the amount is used to purchase, construct, or was not used to improve sufficiently. householders.”

Prices come in fixed and variable options.

HELOCs can have a fixed or variable rate. A fixed rate is beneficial when saving for a small amount initially, but if it is likely to drop in the future, it would be better to have a variable. It really depends on your personal financial situation and what rate is offered at the time of application. Knowing that if you get a low variable rate, it may not stay low for very long.

The bottom line

HELOCs can be a cost-effective and valuable way for homeowners to access financing 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 equity. And if you use a HELOC for major home repairs or renovations, you can deduct the interest paid when you file your tax return. But keep an eye on the process and understand that HELOCs come in both fixed and variable rates. Make sure you know which version will be best for your situation – and the most affordable.

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