Mortgage Interest And Itemizing Deductions
Keep in mind that if you refinance your mortgage, this may decrease your total tax deductions significantly. When you are able to refinance to a lower rate, you may pay less interest, meaning you will have less mortgage interest that can be deducted at tax time.
Your interest costs can reduce substantially if you switch to a 15-year mortgage with a 3% interest rate from a 30-year mortgage with a 5% interest rate. Along with a lower rate, a shorter term can mean your interest costs fall faster over the coming years, also decreasing the amount you can deduct.
For many homeowners, their mortgage interest deduction is the factor that leads them to itemize deductions. Unless your deductions can exceed what you would receive from the standard deduction, there may be no point in itemizing. Revised benchmarks for deductions may decrease the chance that you will gain tax savings from a refinance when you itemize deductions. A tax preparer can help you determine whether itemizing or taking the standard deduction is a better financial option for you.
Overall, you may be saving money by reducing your interest costs, regardless of whether you can deduct your costs at tax time. However, you may want to anticipate that if you refinance, your deduction may be a smaller amount than you expected.
Ways To Cash In On Your Home Equity And The Tax Implications Of Doing So
Homeowners might be feeling richer lately, and its not necessarily because the recent tax cut has left more dollars in their paychecks. Rising home values are creating record levels of home equity.
Recent data from the Federal Reserve show that American homeowners have an estimated $14.4 trillion in equity, an amount that grew by nearly $1 trillion last year.
People have more home equity now than they did at the height of the housing bubble, partly because of climbing prices and partly because people are staying in their homes longer, which gives them more time to appreciate, says Joe Mellman, a spokesman at the consumer credit reporting agency TransUnion. At the same time, we havent seen people borrowing as much from their home equity as they did in the past.
Equity, which is the difference between your homes value and your mortgage balance, accumulates from paying down your loan and from the increase in home prices.
Since May 2012, prices measured by the Standard & Poors/Case-Shiller national index have increased annually by an average of 6 percent.
When To Think Twice Before Getting A Heloc
While a HELOC is a good choice for some people, its not right for everyone. If you only need a small amount of cash, a HELOC isnt worthwhile. Since the fees may exceed the amount you wish to borrow, you might be better off with a 0% intro APR credit card, if youre able to qualify for one.
Also, if youre worried that you could spend more money than you actually need to, a HELOC can steer you into a cycle of debt. You should also avoid this financing product if youre unsure of your future earnings and dont feel confident that youll pay off what you borrow.
In addition, dont use a HELOC or any other form of credit, for that matter to meet basic expenses like food and utilities. Instead, focus on how to increase your income and pay down your debt so you can improve your financial situation.
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Does A Home Equity Loan Require An Appraisal
While not every home equity lender requires a full appraisal, all lenders need to determine the value of your home in order to calculate your available equity. If your lender doesnt require a full appraisal, it may obtain these estimates by looking at county assessments, using automated value models or even driving by your home and taking photos. If youve had a full appraisal done within the last six months, the lender may also be able to use that information.
How The New Tax Bill Affects Home Equity Loan Borrowers
These changes also apply to cash out refinances. A cash out refinance is when you refinance your primary mortgage to borrow money above and beyond your outstanding mortgage balance. As with a home equity loan, you need to determine whether the cash out portion will be considered “acquisition indebtedness. In other words, whether the cash out portion will be used to improve your home.
However, this is relevant only if you will continue to itemize your deduction under the new law. As per the recent changes, the standard deduction has increased substantially from $12,700 for a married couple filing jointly to $24,000 .
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Qualify For A Home Equity Line Of Credit
You only have to qualify and be approved for a home equity line of credit once. After youre approved, you can access your home equity line of credit whenever you want.
Youll need:
- a minimum down payment or equity of 20%, or
- a minimum down payment or equity of 35% if you want to use a stand-alone home equity line of credit as a substitute for a mortgage
Before approving you for a home equity line of credit, your lender will also require that you have:
- an acceptable credit score
- proof of sufficient and stable income
- an acceptable level of debt compared to your income
To qualify for a home equity line of credit at a bank, you will need to pass a stress test. You will need to prove you can afford payments at a qualifying interest rate which is typically higher than the actual rate in your contract.
You need to pass this stress test even if you dont need mortgage loan insurance.
The bank must use the higher interest rate of either:
- 5.25%
- the interest rate you negotiate with your lender plus 2%
If you own your home and want to use the equity in your home to get a home equity line of credit, youll also be required to:
- provide proof you own your home
- supply your mortgage details, such as the current mortgage balance, term and amortization period
- have your lender assess your homes value
Youll need a lawyer or a title service company to register your home as collateral. Ask your lender for more details.
What Are The Warning Signs Of A Dishonest Lender
Dishonest lenders may contact you with a supposed deal on financing. They may say your credit history doesnt matter. They will try to push you into more expensive agreements with less favorable terms and pressure you to commit before youve had a chance to research and consider other options. Know that legitimate lenders will give you time to review the terms of the offer in writing and want you to understand them. They will never ask you to sign blank documents or hide disclosures and key terms.
Here are some rules of thumb to spot and avoid dishonest lenders:
- Avoid a lender who wants you to apply to borrow more than the amount you need.
- Dont deal with a lender who wants you to get financing with monthly payments bigger than you can comfortably make.
- Never work with a lender who wants you to lie on a financing application like saying your income is higher than it really is.
- Avoid lenders who say to sign blank forms. If they fill in the blanks later, you dont know what theyll say.
- Never work with a lender who says you cant have copies of the documents you signed. Of course you can.
- Dont deal with any lender who tells you not to read the financing disclosures. The law says you must get them, so make sure you do and be sure to read and understand them before you sign for the financing.
- And be sure to avoid any lender who promises one deal when you apply, but gives you a different set of terms to sign, with no good explanation of the change.
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How Canadians Are Relying On Their Home Equity To Help Fund Their Retirement
If youre a Canadian homeowner aged 55-plus, you can take out a CHIP Reverse Mortgage from HomeEquity Bank, which allows you to cash in some of your homes equity. You can borrow up to 55% of your homes appraised value, with the amount dependent on your age, your homes value and condition, and where you live. Because the qualification process does not take into account income or credit score, a reverse mortgage can be much easier to obtain than a regular mortgage or home equity loan.
Canadian retirees are increasingly turning to reverse mortgages to help fund their retirement because the tax-free money can be used for any reason, including paying for monthly expenses, home renovations or even vacations. Most importantly, you dont have to pay back what you owe until you sell your home or move out, so a reverse mortgage boosts your retirement income.
Call us toll-free at 1-866-522-2447 and find out how much tax-free cash you could borrow to cash in some of your home equity.
Home Equity Tax In Canada
In 2019 and 2020, some media outlets reported on the possibility that the government might introduce a Canada home equity tax on peoples primary residences. These reports came about after the Canadian Mortgage and Housing Corporation commissioned research from the University of British Columbia looking into the possibility of a home equity tax proposal in Canada.
The CMHC denied that it was planning on introducing a Canadian home equity tax for peoples primary residences. Nonetheless, the issue of a home equity tax in Canada came up again in 2021.
We shed some light on the issue of Canadian home equity tax and answer some typical questions: what is the federal home equity tax in Canada do you have to pay taxes on home equity how does home equity tax work what impact would a principal residence Canadian home equity tax have on homeowners how would a tax on home equity in Canada affect the economy?
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Records Of Expenses And Deduction Limits
Next, keep proper records of your expenses. The odds of being audited by the IRS are generally low, but you do not want to take any chances. If youre planning to use a home equity loan or HELOC to pay for home repairs or upgrades, be sure to keep receipts for everything you spend and bank statements showing where the money went.
Finally, remember that this deduction is not unlimited. You can deduct the interest on up to $750,000 in home loan debts, if the loans were made after Dec. 15, 2017. If your total mortgage debt is higher than that, you won’t be able to deduct all of the combined interest paid. The $1-million cap applies for mortgages obtained before that date.
As interest on older mortgages retains a legacy to $1 million loans, check carefully with your accountant about what you can deduct if you have both an older mortgage and a home equity loan that qualifies for deductions.
Guidelines For Home Equity Loan Tax Deductions
The standard rule is that a couple can deduct the interest paid on up to $100,000 in home equity loan debt and a single filer can deduct the interest on up to $50,000. So if a couple has a $100,000 home equity loan and paid $7,000 in interest on it over the course of the year, they can take a $7,000 deduction on their joint tax return.
That’s going to cover most home equity borrowers. But there’s an added wrinkle that can raise those limits depending on how you use the money.
The IRS allows couples filing jointly to deduct the interest on home loans for up to $1 million in home acquisition debt, and up to $500,000 for single filers. Most of the time, that’s going to be the deduction for the primary mortgage used to purchase the home.
However, the IRS defines home acquisition debt as debt used to “buy, build or improve” a home. So if you take out a home equity loan and use it for home repairs or improvements, it’s considered home acquisition debt and subject to the higher $1 million/$500,000 limits.
So if a single filer were to take out a $75,000 HELOC and use it to build an addition onto his home, he could deduct the home equity loan interest paid on the entire $75,000. But if he were to use it to buy a boat or pay for his daughter’s college expenses, he could only deduct the interest paid on the first $50,000 of the amount.
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Common Uses Of A Heloc
One of the benefits of a HELOC is its versatility. You can use it to cover just about any type of expense. Some of the most common uses for HELOCs include:
- Home improvement projects If youd like to update your home, a HELOC is a great option. You can withdraw funds to remodel your kitchen, add an office, finish your basement or anything else. Its a good idea to choose home improvement projects that increase your homes value.
- Debt consolidation Consolidating your debt with a HELOC may make sense if youre overwhelmed with high-interest credit card debt. With a HELOC, you can save hundreds or even thousands of dollars in interest. But keep in mind that a HELOC could put your home at risk if youre unable to repay the credit as agreed. Credit card debt is not secured by your home.
- Medical expenses Unfortunately, insurance doesnt always cover all your medical expenses. If youre facing out-of-pocket healthcare costs and dont have the cash to cover them, a HELOC may be an option.
Refinancing Your First Mortgage
When you refinance your first mortgage, you can opt to pay off the old loan and replace it with a new one for the same amount. By contrast, the amount of a cash-out refinance loan exceeds the amount you owe on your home.
The primary goal of a conventional refinancing loan, known as a rate-and-term refinance, is to score a lower interest rate and reduce your monthly payments or to change the term of the loan . Although it’s a complicated process that might require the help of a professional, it’s possible to squeeze some extra cash out of a conventional refinance without it being designated a cash-out refinance.
A traditional mortgage refinance typically requires you to have at least 20% equity in your home.
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Under The Rule Can I Waive My Right To Cancel The Contract
If you have a personal financial emergency like damage to your home from a storm or other natural disaster you can waive your right to cancel. That eliminates the three-day waiting period so you can get the money sooner. To waive your right:
- You must give the lender a written statement describing the emergency and stating that you are waiving your right to cancel.
- The statement must be dated and signed by you and anyone else who also owns the home.
Your right to cancel gives you extra time to think about putting your home up as collateral for the financing to help you avoid losing your home to foreclosure. If you have a personal financial emergency, you can waive this right, but be sure thats what you want before you waive it.
How To Find The Best Home Equity Lender
Finding the best home equity loan can save you thousands of dollars or more. Shop around to find the best deal. Different lenders have different loan programs, and fee structures can vary dramatically.
The best lender for you can depend on your goals and your needs. Some offer good deals for iffy debt-to-income ratios, while others are known for great customer service. Maybe you don’t want to pay a lot, so you’d look for a lender with low or no fees. The Consumer Financial Protection Bureau recommends choosing a lender on these kinds of factors as well as loan limits and interest rates.
Ask your network of friends and family for recommendations with your priorities in mind. Local real estate agents know the loan originators who do the best job for their clients.
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Talk To Your Tax Preparer
These are just general guidelines. Different rules may apply to your specific situation and various circumstances can complicate the picture. Talk with your accountant or other tax professional before making any decisions on a home equity loan based on tax ramifications, or before claiming deductions on your tax returns.
What Can You Do With A Home Equity Loan Or Heloc
You can do whatever you want with a home equity loan or HELOC: finance your son’s education, take an extravagant trip, or buy a big screen television. Some people use it to consolidate debts that they’ve racked up on various credit cards.
However, the most prudent way to spend the cash is on improving your home. If you aren’t able to pay the loan back, you risk foreclosure, but if you used the cash to improve your home, you should see an increase in its value . This gives you the option to refinance if you need to and, if the value of your home has gone up, you’ll be more likely to qualify for the loan. Moreover, you may be able to deduct home equity loan or HELOC interest if the loan money is spent on the home, but not for other purposes .
HELOCs work well if you are making improvements on your home and have ongoing expenses. Often borrowers get them as an added safety net, in case they need cash suddenly, but without real plans to draw on them otherwise.
You may just want to have this source of cash in your back pocket for emergencies — but make sure there’s no requirement that you draw some amount, as some lenders require this so that they’re assured of making a little money on the deal.
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