If you already have a home in these economic times and you want to save more money or have some extra cash, you might want to check your home equity line of credit or HELOC. A HELOC is a loan that lets you borrow against the value of your home to a certain degree. You can then use the loan for anything that you need at the time or even invest it to improve your home.
Depending on how you use your funds and how much you’re planning on borrowing, note that it can affect your taxes. The recent changes in tax law have made it more complicated and more restrictive when it comes to using your HELOC.
If you want to learn more about saving tax via HELOC as well as tips on how to use your HELOC wisely, check out the article below. It will help you make informed decisions and save money on your taxes.
Understanding What HELOC is All About
A HELOC or home equity line of credit is a loan where you use the equity of your home as your source of funds. Equity is the difference between the value of your home and the amount you owe on your mortgage.
This means that the more equity that you have, the more you’re able to borrow money with a HELOC. HELOC is a revolving form of credit with different interest rates which is very similar to a credit card.
It doesn’t have a fixed interest rate like a home equity loan. It allows you to borrow and pay your funds on an as-needed basis for a certain period most likely during the first few months.
After that, you will need to pay back the amount you borrowed in monthly installments.
What are the Uses of HELOC
There are a lot of uses of HELOC and they serve a very important purpose. You can use your HELOC for home repairs and improvements which can increase both the value and the comfort of your home.
This is one of the most common reasons why people often get HELOC as it also qualifies you for tax deductions on the interest that you are paying. This can be applicable only if you meet certain qualifications. Many people also use HELOC as debt consolidation to pay other high-interest debts from loans and credit cards.
It might be risky to do so especially if you do not have a plan to pay your HELOC. While many focus on home improvement and debt consolidation, others use it for education, medical, and even business expenses. It is one of the most versatile forms of credit that you can use.
Benefits of Taking Out a HELOC
Many people might not know this but there are a lot of benefits of taking out a HELOC. Some of the benefits of taking out a HELOC include flexibility and affordability.
You can borrow money as often as needed as long as you do not exceed your limit with your HELOC. You can even repay and draw your funds again which is very useful if you are not yet sure of how much money you need for your next project.
For those who are looking to make good use of the money while also saving can expect to have access to lower rates than many other forms of personal credit or loans.
With HELOC, you only pay the interest on the amount that you’ve borrowed and not the entire limit. This makes it more affordable which can help you fund your home improvements, debt consolidation, and even your education.
Drawbacks of Taking Out a HELOC
As always, no financial transaction comes with zero risks. There are certain things that you need to consider first before taking out a HELOC, especially the downsides. While you can always use the money to fund your home improvement or education, you still need to repay your debt and if you do fail, you might lose your home as a result.
Your lender can even reduce or limit your credit at any time which can affect how you can access your funds. There are also various fees to contend with including annual fees, valuation fees, arrangement fees, product fees, and many others.
Lastly, your HELOC can affect your credit score especially if you cannot make on-time repayments. This can widely affect your ability to borrow or secure additional funds for your home.
Saving Money on Taxes with HELOC Deductibles
In many countries like the US, the interest that you pay with your HELOC is tax deductible depending on how you use your loan. The best example to save money on taxes with HELOC deductibles is when you use the funds for home improvements.
This means that you can deduct the interest on expenses such as building a new home, renovating your kitchen or bathroom, or even as simple as repairing an old roof. You are not allowed to deduct the interest on expenses that are not related to home improvements like paying your credit card debt, medical bills, or funding your education.
The deduction is also quite limited based on the new rules for home equity tax deductions. The limit is currently up to $750,000 and the limit applies for loans taken out after December 15, 2017. If you want to save money on taxes with HELOC deductibles, make sure to use the loan for home improvement only.
How to Claim HELOC Deduction
To deduct your home equity loan interest on your tax return, make sure that you gather the required documents which include a mortgage interest statement or Form 1089, a statement for additional interest paid, and any proof of how your home equity funds were used such as receipts and invoices for home improvement.
You also need to make sure that your loan is qualified or that your loan is used only for home improvement and not anything else. After that, add up all of your payments for tax deductions.
You can also check with your accountant about this so you can accurately define your HELOC deductions.
A HELOC is a powerful financial tool if you use it responsibly. While it is not for everyone since it comes with its own set of risks, you should consider your financial situation, your financial goals, and other alternative ways before choosing this option. Try to shop around for the best terms and rates from different providers and if needed, you can always seek the help of a financial advisor to lay out the perfect plan for you.