October 2018

With the recent rise in the market, having equity in your property may help improve your home or alleviate some debt, but there are some strings attached.

The most important thing to remember is that if you use a line of credit for anything other than improving your home, it is not tax deductible, and if it is tax deductible, it must fall within the $750,000 mortgage write-off limit. There are two factors that determine how much money you can draw from a home equity loan: the balance of your mortgage, and the value of the property. The lender usually allows you to draw up to 89 percent of the home value at an interest rate slightly higher than a mortgage, today around 6.5 percent. Shop around for the best rate and terms. Remember: you do not have to use the same lender that currently has the mortgage on your home.

Home equity lines are used primarily for home improvements, college tuition, or debt consolidation. Credit cards may have interest rates that can exceed 15-30 percent per month or more! Lower interest rates will pay your debt down faster, but remember, under the Tax Cuts and Jobs Act, you can only deduct the debt if used to buy, build or improve the home that secured the loan. It is not a good idea to borrow from a HELOC (Home Equity Line of Credit) to pay ordinary bills. Eventually, the HELOC funds will run out and the debt will continue, which could result in a temporary Band-Aid to avoid foreclosure. If the source of the debt is spending habits, then examine those habits and spend within your means.

Also remember that credit reporting companies use the full amount of the equity line against your debt, even if you have a zero balance. The ease and ability to obtain money from a home equity line may have a negative effect on your credit. Consider all options before you borrow.

Home equity lines are great but...