It’s officially summer! You might be thinking about working on that home improvement project you’ve been putting on the back burner. Or maybe you’ve seen the “For Sale” signs popping up around town – thinking about purchasing a new home. Unrelated to your home, you might be thinking about how to pay for your child’s college education when they head off on their own in the fall.
With interest rates remaining low, home equity lines of credit, or HELOCs are often the perfect lending instrument to finance these projects. An HELOC not only minimizes interest expenses, but also provides tax benefits. But if you’re going to use it for purposes unrelated to your home, make sure you’re familiar with the tax benefits of doing so.
There are three different ways to benefit from using HELOCs regarding the specific use of the proceeds:
- Purchasing Your Home
If a HELOC is used to purchase a home, the interest can be fully deductible. Buyers often try a “first/second mortgage combination” to cut their down payment in half. The combination is referred to as an “80-10-10”, comprised of an 80% first mortgage, a 10% HELOC, and a 10% cash down payment.
- Making Improvements to Your Home
Interest is also fully deductible if the money is used to make major improvements to your home. This can include major repairs and renovations, such as replacing the roof, carpeting, or components, such as the furnace, central air conditioner or hot water heater. Or even renovating the kitchen, bathrooms or finishing the basement.
- Unrelated to Your Home
This is where the HELOC interest may not be tax deductible. Whether you’re consolidating high interest credit card debt, helping to pay for your child’s college education, or paying for a wedding or a vacation trip, you can deduct interest on a HELOC balance of up to $100,000. However, it’s not usually a good financing pattern to get into.
Here’s a great guide that explains the differences regarding the use of proceeds that come from a HELOC.
As always, we recommend you consult your tax advisor with any questions regarding your tax filing.
If you’re considering an HELOC, or simply have questions about your current HELOC loan, call us today to speak with one of our expert loan officers.
By Mike Karcher
Chief Lending Officer