HELOC Myths That Separate Homeowners from Their Mounting Equity

American homeowners have nearly $16 billion in available home equity. Some homeowners will take advantage of the funds available to them by applying for a home equity loan or home equity line of credit (HELOC). Others will wait to access their equity when they sell their homes, while another group of financially-strapped homeowners won’t consider tapping into their equity due to false assumptions. Misconceptions originate from family, friends, and unreliable online sources.

Here are some common HELOC myths that keep homeowners from the available funds needed to pay off high interest rate debts, complete a renovation project that can increase their home’s value, or provide access to the cash required to meet another financial goal.

Myth #1 – The new tax rules took away the ability to write off the interest paid on a home equity loan.

Homeowners can still write off the interest paid on HELOCs and home equity loans. The Tax Cuts and Jobs Act, which became effective in the 2018 tax year, made changes that impact the circumstances under which a homeowner can still deduct the interest paid on a home equity loan. If you’re eligible and choose to claim itemized deductions on your tax return, you’ll need to pay special attention to how you use the loan funds as well as the new claim limits. If you plan on reaping the tax benefits of a home equity loan, then the loan must be secured by your main home or second home, and have been used to buy, build, or substantially improve the main or second home. Since each person’s tax situation is unique, please consult a tax advisor for further guidance.

Myth #2 – A HELOC is the same as a home equity loan.

A HELOC and a home equity loan have several important traits in common. Both use your home as collateral for the loan, have potential tax benefits, and can be used for items other than home improvement. Their differences, however, can save you money if you select the one that best matches your financial goals.

HELOCs are commonly:
• Approved for a set dollar amount from which borrowers can draw from as needed
• Preferred by borrowers who have several projects to complete or have a large project that will be completed in stages
• Granted with a variable interest rate

Home Equity Loans are commonly:
• Disbursed in one lump sum
• Preferred by borrowers who need a predictable monthly payment amount
• Granted with a fixed interest rate

Whether you choose a HELOC or a home equity loan, funds are available for use at your discretion at rates lower than those of most credit cards and personal loans.

Myth #3 – I’ve haven’t lived in my home long enough. I don’t have equity.

Usually, the equity in your home is determined by your home’s current market value minus the amount owed on the house. The wider the spread, the more equity. If you’ve only been in your home for a short time, it’s still possible to have substantial equity. It’s not necessary to have even paid a significant amount on your mortgage loan balance if home values in your area have risen since you purchased your home. The Federal Housing Finance Agency reported that housing prices increased by 5.7 percent from 2017 to 2018. Certain areas of the country had an even higher uptick in home prices.

It’s possible to use the equity in your home to bridge the gap between your financial dreams and a new financial reality. Unsure if you qualify? Contact our Mortgage Center at 978-968-2200 to speak to one of our Community Credit Union Mortgage Lending Representatives or email us at mortgagecenter@myccu.org.