Use Your Home Equity
There are a number of reasons to consider refinancing your mortgage other than to just lower your interest rate:
- Consolidating debt
Often times through life altering events outside of your control or from some previous bad habits people rack up high interest rate unsecured debt. It could be credit card debt, personal loans, or unsecured debt consolidation. The problem is that all of these types of loans carry high interest rates and are not tax-deductible. Using your home’s equity to pay these higher interest loans off at closing can not only lower your overall monthly cash flow burden, but will give you additional tax savings (more on tax savings below).
- Home improvement
The most cost efficient way to invest funds into your home is by using your home’s equity. Through either a Home Equity Line of Credit (HELOC) or a Cash-out refinance you can obtain funds to use as you wish. This may be for any type of home improvement as long as it fits your budget of course. It’s the cheapest method of borrowing in terms of interest rate and again… it’s tax deductible. Many financial planners will advocate using your home’s equity as a re-investment tool to further enhance your home’s value rather than using additional funds that you may have accumulated in savings or investments.
- For investments in things that have longevity and importance to you and your family
If you are paying for college tuition or looking to fund a charity that is near and dear to you—the equity in your home can provide a vehicle to accomplish those goals. It is important to note that we never advocate the use of your home’s equity as a lifestyle tool. Many borrowers made poor choices in this regard during the Real Estate boom from 2000 to 2006. We recommend that you work closely with a Professional Financial advisor that can help guide you when deciding if it makes more sense to use personal funds from savings or home equity in these instances.
- As an emergency fund
Many times over the past several years we helped our clients set up an Equity line on their home residence even though they may not have needed it at the time. A home equity line of credit (HELOC) can provide a tool for you to borrow against when you may have a large unexpected expense, a short term financial hardship, or face a family medical issue that requires more short term expenses than what you have in your family budget. Often times this emergency home equity fund, if used with discipline, can help keep you out of deeper financial problems because you have a place to turn in times of financial distress that can keep you from burning through your savings.
A word about using your tax deductible home equity:
Currently a homeowner can deduct mortgage interest expense on Schedule A of an itemized tax return on loans up to $100,000 over and above acquisition indebtedness on a qualified residence with a limit up to $1,000,000.
Acquisition indebtedness simply means the total amount of the original loan(s) you took out when you bought the property. Your acquisition indebtedness does go down as you pay your mortgage down.
A qualified residence is defined as the principal residence of the taxpayer and one other residence belonging to the taxpayer, selected by the taxpayer and used by the taxpayer as a residence. The secondary residence can be a condo, cabin, motor home, camp trailer, or even a boat as long as it meets certain requirements such as having bathroom facilities.
As always you should seek the advice of a competent tax professional for full details on tax deductions.