You pay your mortgage (and other bills) on time every month, have a habit of keeping credit account balances low, and limiting new lines of credit. So, you’re not surprised that credit offers fill your mailbox daily. You usually shred these credit offers, until last week when a home equity line of credit (HELOC) offer arrived and caught your attention. The sales page noted the perks of a HELOC but left you with several unanswered questions, including the difference between a mortgage loan and a HELOC.
Read on to discover how a mortgage loan and a home equity line of credit differ and how both can be beneficial come tax season.
What is a mortgage loan?
Since you’ve been through the mortgage loan closing process, you already know that a mortgage is a loan from a bank, credit union, or other financial institution that allows you to purchase a home without paying cash. The mortgage loan, which is secured by the residence itself, may either be a variable or fixed rate loan with a set repayment term, usually 15 or 30 years. Your mortgage allows you to:
· Stop renting from a landlord
· Avoid continual rent increases which often occur at the end of each leasing period
· Bring stability to your budget by paying the same amount for housing year after year
· Showcase your design talents without the constraints of renting, e.g., painting walls the color of your choice, carpet-free living, etc.
· Purchase an appreciating asset that builds equity over time
· And much more…
What is a HELOC?
Like a mortgage, a HELOC, or home equity line of credit, is a loan secured by the home itself. A HELOC differs from a mortgage loan in that the credit line is based on your equity, generally defined as the current market value minus the amount owed. American households have close to $16 billion available in home equity, and many homeowners don’t know it.
HELOCs are a flexible borrowing option which work much like credit cards without the high-interest rate. Homeowners can continually draw upon the approved line of credit as needed without re-applying while they repay according to the loan agreement.
Why homeowners use HELOCs?
Homeowners can use a HELOC for any reason that they choose as long as they align with the terms of the loan agreement. Common uses include:
· Debt elimination, i.e., high-interest credit cards, IRS back taxes, private student loans, medical bills, etc.
· Paying for college expenses not covered by grants, scholarships, or low-interest federal student loans
· Financing special events such as a 25th wedding anniversary, college graduation, or family reunion
· Purchasing a second home or vacation home
· Bridging the gap between the amount available in a savings account and the amount needed for “you name it”
What are the tax benefits of a mortgage and a HELOC?
The Tax Cuts and Jobs Act of 2017 brought with it significant changes to how, what and when taxpayers qualify for deductions under the federal tax code. The tax benefits of a mortgage loan and a home equity line of credit are linked to the interest paid on these loans. In both cases, the loan collateral is the home itself or a second or vacation home. Interest paid on a home loan or HELOC is deductible only if the loan is used to buy, build, or substantially improve the main home or second home.
Qualification and dollar limits apply as described in IRS Publication 936, Home Mortgage Interest Deduction.
Taxpayers who take the standard tax deduction, won’t be able to also take an itemized tax deduction for mortgage interest. We encourage borrowers to review the updated law and speak to a financial professional to determine how the updates impact their specific financial situation.
Homeowners have financial options when they build equity in their homes. Equity plus good credit can mean a low-interest rate way to fund major home improvement projects or pay for other significant expenses. Use a HELOC to access equity now without waiting until the time of sale. Contact a loan representative today to discuss how a home equity line of credit can help you achieve your financial goals.