Home equity loan questions to know
With so many credit options on the market, it can quickly become confusing trying to navigate which one is best for you. While credit cards and personal loans are two of the most popular types, they don't always come with the best interest rates. Fortunately, homeowners with even a minimum of equity in their home can use that equity as a low-interest form of credit. This can take multiple forms, but two of the most well-known are home equity loans and home equity lines of credit (HELOCs).
Both types access the equity the homeowner has accumulated to use it as credit to pay for large expenses like home renovations and repairs, 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 out of them. In this article, we will break down the answers homeowners should know to three important home equity loan questions.
If you think you could benefit from taking out a home equity loan, start exploring your options here now.
Home equity loan questions to know
Here are three important questions homeowners should think about as they apply for a home equity loan.
What do you need the money for?
The potential uses for a home equity loan are limitless. You can use it to pay down debt (or pay it off entirely), fund large expenses like weddings and college tuition or even finance major home repairs and renovations. It's the latter category, however, where home equity loans are particularly favorable. That's because the interest paid on these loans is tax-deductible if used for IRS-eligible reasons.
"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."
"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 goes on to say. "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."
Again, home equity loans can help finance many things, but if you know you need money for a home repair, this is likely your best bet as most other credit types won't let you deduct the interest you paid come tax season.
Explore your home equity loan options here now to see what you're eligible for.
When do you plan on applying?
Timing is everything, including when it comes to home equity loans. Ideally, you should 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 that has experienced a jump in home prices in recent years, now is the time to act. If you wait, and the economy worsens, it could have a trickle-down effect on your home's value, reducing what you can potentially withdraw.
And remember: Home equity isn't just what you've paid into your mortgage. It's also what your home is valued at when you apply. So if you've paid $50,000 of your principal off and your home value has since increased by $100,000, you have a total of $150,000 in equity - not just the $50,000 you paid. Just be sure to apply when the value is high to get the most equity.
How quickly do you need the money?
If you're planning on using the money sometime in the near future, a home equity loan may be a viable alternative to pursue. If you need the funds for urgent emergency purposes (think: a major home repair like a new roof), you may not be best served 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. To determine the latter figure, you'll need to have your home appraised. Setting this up, having it completed and getting the results in the hands of the lender you're using could take weeks (if not more than a month). While that may not be a factor for a project you can hold off on, it could be a disqualifier for homeowners with more pressing needs.
The bottom line
Home equity loans provide homeowners with a low-interest credit option to use as they see appropriate. Prospective borrowers should first understand why they need the money as this type of credit has unique tax advantages when used for IRS-eligible reasons. Homeowners should also time their applications as carefully as possible to get as much equity out of their homes as possible.
Finally, they should understand that it takes a few weeks to have the funds from a home equity loan disbursed, so if they need immediate cash, they may be better off going the personal loan or credit card route.
Learn more about your home equity loan options here now.
