All Posts Tagged: tax-deductible

Home equity loans and home remodels go hand-in-hand

Karen Mayfield
Mortgage Banking

Home remodeling has been picking up.

What we have seen in the past is that many homeowners turn to home equity lines of credit and home equity loans as convenient ways to pay for home improvements.

Back of male construction worker on a ladder, removing some siding on a house. The latest Leading Indicator of Remodeling Activity (LIRA) released April 17 projects solid growth in spending on remodeling this year. The LIRA is produced by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University.

Many homeowners find tapping the equity they have in their home is a smart way to pay for a kitchen remodel, new windows, a master bathroom, or other improvements. The interest rate on a home equity line of credit or loan will likely be lower than the rate on your credit card. Also, unlike a credit card, interest on a home equity loan may be tax-deductible. I’m not a tax expert, so you should consult a tax professional to find out more.

But which is right for you — a home equity line of credit or a home equity loan? To help you determine which might make more sense for you, consider the interest rate and payment options for each and what is within your comfort zone.

Home Equity Loan: A home equity loan typically comes with a fixed interest rate and has several advantages.

1.)    You have a predictable monthly payment.

2.)    You have a set repayment schedule, and your monthly payments go toward paying down the balance.

3.)    You receive the full amount of your loan all at once so you can apply the funds toward your intended project or uses.

Home Equity Line of Credit: A home equity line of credit (HELOC) has a variable interest rate, which will tend to be lower, at least initially, than the rate on a home equity loan. HELOCs have what’s known as a draw and a repayment period:

1.)    During the draw period, your monthly payment is an interest-only payment, so it will be smaller than if you were paying interest and principal.

2.)    Because it is a line of credit, you can withdraw funds as you need them during the draw period. This means you only pay interest on the outstanding balance.

3.)    Just as you can withdraw funds as you need, you also have the flexibility to pay down the balance as you wish based on your needs. If you have extra cash, you can apply that toward the principal and reduce your interest expense and your monthly payment.

4.)    Some lenders – including Bank of the West – offer a fixed-rate loan option (FRLO) that will allow you to convert all or a portion of your outstanding variable rate balance to a fixed rate . Your lender will almost certainly have some terms and conditions on an FRLO so check your original documentation or talk to  your lender.

5.)    If you never draw funds from it or pay it off, a HELOC can give you some peace of mind as an “Emergency Fund” that is available if you need it.

Here are a few things to understand about both HELOCs and home equity loans:

1.)    The interest paid on a HELOC or home equity loan may be tax-deductible. You should check with a tax advisor regarding your situation .

2.)    Both provide an option for consolidating debt into one manageable monthly payment. They require careful financial management to avoid the temptation to consolidate credit card debt, and then proceed to run up your card balances, again.

3.)    Because HELOCs and home equity loans are secured by the borrower’s home, lenders view them as less risky than other types of credit, such as credit card debt or auto loans. This means rates tend to be lower than rates on those other types of credit.

4.)    People use HELOCs and home equity loans for many purposes, including home improvements, educational expenses, and even family vacations.

==

Want to learn more? You can use the Bank of the West site to find a local mortgage banker and check rates.

Read More ›