Home Equity Loans and Taxes

• A home equity loan allows you to borrow against the value of your home when you refinance your  mortgage.
• If you itemize, you can deduct the interest on your home equity loan or line of credit.
• Because you're borrowing against the value of your home, failure to make loan payments could cost you your home.

You can borrow money against the value of your home with a home equity loan or a home equity line of credit. Both are secured with a second mortgage.

A home equity loan is usually distributed in 1 lump sum, and its rate is fixed for the entire term of the loan. A home equity line of credit can be accessed at your discretion. Unlike a home equity loan, the rate for a home  equity line of credit fluctuates based on an index and often converts to fixed rates after a predetermined period of time.

Both provide access of up to 100% or more of the equity in your home.

Tax Advantages

The annual interest charges on a home equity loan or credit line may be fully deductible if you itemize your deductions, an important factor that distinguishes these loans from other forms of consumer credit. Because the collateral for the loan or credit line is your home, interest rates are significantly lower than other consumer loans or credit cards.

Potential Risks

When considering this type of loan, remember that your house is the collateral. Failure to repay can cost you your home. Also, think carefully about the items you plan to buy with your loan or credit line. Depending on the equity you have in your home and its market value, your financial institution may make as much as $100,000 available to you. If tempted to overspend, a home equity loan with a lower, set amount may be better than a flexible line of credit. 

Laws on this topic may vary from state to state. This content is not meant to provide you with complete information and it is not intended to be legal or tax advice. It is recommended that you consult with your own attorney, accountant or other advisor regarding your specific situation.