Home Equity Loan Tax Deduction

Home equity loans are appealing to many because it allows them to take a loan based on the market value of their property and they have the freedom to use the funds for a variety of purposes, including renovation, educating their children, paying off other financial obligations such as credit cards or even using the funds as a deposit to purchase their next home. In addition, the interest rates for such home equity loans are lower. You may be able to get a higher amount based on the value of your property and, best of all, the interest paid on home equity loans is tax deductible.

The risks involved
Before you rush off to find a financier to provide you with details on how to take out a loan on existing property however, you should note that it is not a simple case of access to funds without obligations. You will need to ensure that you can meet the payment schedule or you risk losing your home. Also for home equity loans, it is better to work with reputable financial institutions, even though they may offer a lesser amount on the loan, rather than risk being cheated by unscrupulous lenders.

What does a tax-deductible home equity loan mean to you?
Tax deduction on interest paid is only applicable to your first and second homes. In addition, there is a ceiling to the amount that can be deducted. The general rule is that the tax deduction only applies to interest paid on the first $100,000. This limit is applicable even where the borrower has more than one loan and these loans are secured against more than one property. If, however, the funds from the home equity loan were used to purchase your second home, then the deduction base increases to up to $1 million or the value of the home.

Preparing to take a home equity loan
In order to enjoy the benefits of a home equity loan, your credit rating is important. You must ensure that you have good credit scores and it may be possible to check this with your local bank. Basic things include, ensuring that for at least 6 months prior to making such an application, you maintain a regular payment structure of all your debts, such as mortgage payments, credit card payments and other related financials. This should enhance your credit standing when the financiers do a check, and provide you with greater security that your home equity loan will be approved.

Before signing on the dotted line
Ideally, as you explore the different options available to take out a home equity loan, the first step is to understand the value of your property. This can easily be discovered at no cost to you, by checking with real estate agents on the value of properties in your neighborhood. This will then provide you with a gauge of what you may be able to get when applying for such a loan.

Do a little research on the internet to explore what options are being given by financiers, in terms of interest rates, amounts of the loan and flexibility of payment structures. From there, move your exploration closer to home and meet with local banks to determine your eligibility as well as the rates they will offer. While it is realistic that the home equity loan interest rates are tax deductible, it does not mean that you now have the freedom to pay an unlimited amount in interest. You must still get the best rates that you can. Then consider speaking to your regular financial institution, as you already have a reputation with them and it will be easier to gain approval, as they know who you are.

Home equity loans are generally attractive if you are interested in raising funds from your home. What is also appealing is the fact that the home equity loans allow for a tax deduction on interest paid and this can work out to be a substantial saving. However, before making a final decision, check the facts, check the financiers and determine what works best for you.