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Is the interest on a home equity line of credit (HELOC) tax deductible?

A:

If you need access to cash and have equity in your home, a home equity loan or line of credit can be a perfect solution. There are two types of home equity loans: a fixed-rate loan for a specified amount or a variable-rate line of credit, or HELOC. Depending on your uses and need for the funds, one of these may work better than the other. Interest paid on either loan, like the interest on your first mortgage, is also tax-deductible.

If you choose a HELOC to meet your funding needs, you may borrow up to $100,000 and deduct the interest from your income taxes. For this reason, HELOCs are an attractive way to pay off credit cards and other loans, or to pay for tuition. HELOC rates are only slightly higher than first mortgage rates, making them much lower than other loan options. Similar to a credit card, the interest rate is variable and applicable to the outstanding balance. Sometimes, a HELOC features an option to lock in a fixed interest rate to repay the outstanding balance.

The homeowner may borrow up to a specified amount based on the combined loan-to-value ratio, which includes the outstanding balance from a first mortgage plus the additional requested funds. Generally, the combined loan-to-value ratio for a HELOC cannot exceed 90%. However, some lenders loan up to 125%. If you are selecting one of these loans, any interest on a balance that exceeds the home’s value cannot be tax-deductible. These higher-LTV loans assess higher fees and put you at a higher risk.

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Is the interest on a home equity line of credit (HELOC) tax deductible?

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