HELOC questions homeowners should know
With stubborn inflation and higher prices for everything from groceries to veterinary care, many Americans are looking for new ways to pay for extra expenses.
While traditional ways to do this include credit cards and personal loans, homeowners may find other alternatives more worthwhile. Home equity loans and home equity lines of credit (HELOCs) are two methods. These credit forms typically come with lower interest rates than many other options. If used for eligible purposes, the interest paid can even be deducted when you file your taxes.
As with most financial products or services, homeowners should familiarize themselves with the nuances of a HELOC to get the most value out of it. In this article, we will break down the answers you should know to three important questions.
If you think you could benefit from taking out a HELOC, start exploring your options here now.
HELOC questions homeowners should know
Are you considering applying for a home equity line of credit? If so, be prepared to have the answers to the following three questions.
What are you planning on using the HELOC for?
You can use a HELOC for anything you see fit. There are, however, better times to use a HELOC than others. For example, a HELOC is a great way to finance major home improvements and repairs. In addition, unlike most other credit forms, the interest you pay on a HELOC can be tax-deductible if used for IRS-eligible home repairs.
"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 explains. "The loan must be secured by the taxpayer's main home or second home (qualified residence), and meet other requirements."
So, if you get a HELOC now, make sure to save all appropriate paperwork for filing when it comes time to do your 2023 return. You can easily explore your local HELOC options here to see how much you're eligible to take out.
Do you want to use your current bank?
There is a misconception that when applying for a HELOC or home equity loan. you must use the lender you have your mortgage with. This thinking makes sense since you'll be deducting equity from the loan you've been paying for years (if not decades). But that's not always the case. You can get a HELOC from a lender different than the one that currently has your mortgage loan.
This doesn't mean you shouldn't ultimately use your current lender. Rather, it means you should shop around to secure the lowest rate and best terms available on the market. Your current lender may be your best option. But it's also possible that another bank will offer more favorable terms for your needs.
So don't automatically commit to taking out a HELOC with your current lender. Do your research and sort through all of your available options first.
When are you planning to apply?
The timing of all financial decisions is critical but arguably never as important as when applying for a HELOC. Because HELOCs allow homeowners to access the equity they have in their homes, it's beneficial to act when the market is favorable and home values are high. If you wait and home values drop, the equity you can potentially withdraw will also have dropped.
Remember: Home equity isn't just what you've paid toward your mortgage; it's also what your home is worth on the current market. Let's say you bought a home worth $500,000 and have since paid it down to $400,000. Meanwhile, your home's value has risen to $600,000. That means you have available equity of $200,000 - not just the $100,000 you've paid off.
Conversely, if you're living in an area of the country where home values have dropped in recent months, you may not be able to take as large a HELOC as you could have at other times. So be sure to time your application precisely - it will affect how much you can obtain.
The bottom line
A HELOC can be a smart way for homeowners to pay for additional expenses or fund major home repairs and improvements. However, to get the most value out of this form of credit, homeowners should know exactly what they plan on using it for. They should also know if they want to use their current lender or a different one (they may be able to get better rates and terms with another institution). And they should try to time their application as carefully as possible so they can get the HELOC when their home equity is plentiful.
If you think a HELOC sounds advantageous for your needs, start exploring your options online here now.
