Home Equity Loans are Versatile and Tax Deductible!

A loan to improve your home is money well spent

 Home equity loan values have doubled in the last two years, and the continued low interest rates suggest that the home equity loan will continue to be popular for the foreseeable future. The combination of increasing home values and low interest rates have Americans more interested than ever in borrowing against the equity in their home.

Home equity loans are quite versatile, and they offer a number of benefits that other types of loans, such as credit card loans or secured bank loans, do not. The primary benefit offered from a second mortgage or line of credit is that the interest paid on the loan is tax deductible on loans of up to $100,000. Interest rates on home equity loans tend to be much lower than for other types of loans, and the interest deduction makes this form of loan pretty much unbeatable. If, like many Americans, you pay tax in the 28% tax bracket, you will effectively get a rebate of 28 cents for every dollar you pay interest.

The process of obtaining a second mortgage is fairly simple, and is much less complicated than taking out a first mortgage, which is often a drawn-out process that can often take months to complete. The process involves an application, a credit check, a home appraisal and verification of the borrower’s income, usually by checking paycheck stubs or direct-deposit receipts. The entire process can be accomplished in just a few weeks, and lenders will usually lend up to 80% of a home’s equity. In some cases, you can even borrow up to 125% of the value of the equity in your home, although these types of loans, known as High LTV (loan to value) loans, come with higher interest rates.

Many people wonder, however - its it necessary to use a home equity loan for home repairs in order to qualify for the tax deduction, or can you take the deduction regardless of how the money is used

Few realized it, but the tax deduction is not tied to how the money is used. Many people fail to realize that you are not required to use your money for home improvements in order to qualify for the tax deduction. Home improvement is certainly the most popular reason for taking out a home loan, particularly for kitchen or bathroom remodeling, but other reasons are also quite popular: debt consolidation, buying a boat or recreational vehicle, funding an exotic vacation, or paying for educational or medical expenses. The interest rates for second mortgages, which are currently well under 10%, are certainly more favorable than the 20% or more than one could pay for a credit card loan. This makes borrowing against your home possibly the best choice for those trying to consolidate their debt, where several small loans can be rolled into one large one, reducing both the size of the payment and the number of payments that need to be made each month. But any use, even buying that vacation home in Maine or funding that exotic trip to Greece that you have always wanted to take, qualify for the deduction just the same as if you had spent the money to outfit your kitchen completely with Viking equipment.

Regardless of the reason for taking out a home equity loan, the tax deduction is a welcome bonus. As long as your loan is for less than $100,000, you may use the money as you wish and you may still deduct the interest from your Federal income tax. And that makes borrowing against your home quite a bargain.