When is a HELOC worth it?

If you’re planning on making a major home renovation or repair then interest on a HELOC may be tax deductible.

Donald Iain Smith

For many people looking to make ends meet their options are varied. They can take out a personal loan or open a new credit card. They can also refinance their existing debt to a lower interest rate, although that generally won’t make a substantial difference each month. Or, they can start a part-time job or a passive income stream.

Homeowners, on the other hand, have a unique financial resource that they can rely on: their home. By using a home equity loan or home equity line of credit (HELOC), owners can access the cash they’ve accumulated in their home to get out of debt, pay for major expenses or for most other reasons they find suitable.

As with most other financial products or services, the timing around a HELOC is important to get right in order for homeowners to get the most out of it. But when is a HELOC exactly worth it? That’s the question we will dive into in this article.

If you think you could benefit from taking out a HELOC then start exploring your options here now.

When is a HELOC worth it?

While every homeowner’s individual circumstances and personal finances are different there are some reliable times when a HELOC is worth pursuing. Here are three times it’s worth it:

When you’re planning to use it to make home repairs

If you already know that you need extra money to fund major home repairs, renovations and improvements then skip credit cards and personal loans and apply for a HELOC instead. That’s because, unlike those other options, the interest on a HELOC can be deducted when it comes time to file your taxes for the year in which you used the HELOC.

“Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan,” the IRS says. “The loan must be secured by the taxpayer’s main home or second home (qualified residence), and meet other requirements.

“Generally, you can deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 8a,” the IRS says. “However, any interest showing in box 1 of Form 1098 from a home equity loan, or a line of credit or credit card loan secured by the property, is not deductible if the proceeds were not used to buy, build, or substantially improve a qualified home.”

Explore your HELOC options online now to see if it’s worth it for you.

When you have substantial equity in your home

If you’ve been living in your home for years, if not decades, then you’re probably sitting on a significant amount of home equity. If this is the case then it makes sense to utilize what you have invested versus taking out other, higher-interest credit. 

Most lenders will limit a home equity line of credit at 80% of your home’s equity although some lenders may go above that figure. So, if you have $500,000 worth of equity you can get a line of credit worth $400,000 or more (depending on your credit score and other factors). Considering that a HELOC interest rate is around 7% and personal loans are around 11% (and credit cards are close to 20%), it makes sense to go this route.

When home values are high

Recent interest rate hikes have hurt home values in some parts of the country but have largely left them unchanged in other parts. If you live in the latter part of the country then take advantage of it by taking out a HELOC. Remember, your HELOC amount is determined by the amount of equity you have in your home – not the amount you have paid off your mortgage. So if your home value has risen in recent years you may have a substantial amount of money to work with.

The bottom line

When looking for extra ways to make ends meet be sure to explore all of your options thoroughly. While personal loans and credit cards are common options to pursue homeowners should strongly consider turning to their home investment first. Home equity loans and HELOCs generally come with favorable terms and lower interest rates. It’s particularly worth taking out a HELOC when you’re planning on using it for major home repairs and improvements (due to its interest tax deduction). But it can also be valuable when you have substantial equity built up in your home and/or when your home value is high. 

Learn more about HELOCs online today!

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