This article was originally published on Unison.
Do you own a home? If so, you know the joys and challenges of being a homeowner. Not only does a home give you a place to live, it can also help you financially – by keeping your monthly housing costs stable while avoiding rising housing costs and allowing you to build equity.
According to Black Knight Financial, Americans currently have a record amount of equity in their homes. That means a lot of people have the option to take out a home equity loan or HELOC today. But is 2018 a good time for this type of loan?
Below, we describe the factors you need to look at before tapping home equity in 2018.
Tax Implications of a HELOC or Home Equity Loan
In December of 2017, Congress passed and the President signed a new tax law officially known as the “The Tax Cuts And Jobs Act.” The law made changes that will affect taxpayers when they file their 2018 taxes next April.
For homeowners, the tax law lowered the cap on deductible mortgage interest from $1 million to $750,000. There were also significant changes to how home equity loans are treated under the law.
Want to unlock home equity without making any monthly payments? Try a home ownership investment.
Starting in 2018, interest on home equity loans and HELOCs can only be deducted if the loan was used to buy build, or substantially improve a home. Unfortunately, homeowners can no longer deduct interest on these loans if the money was used to pay for things like education, debt reduction, or medical bills.
If you are considering taking a loan this year, it’s important to understand that you may or may not be able to deduct the interest on the loan. It’s wise to consult your financial or tax advisor before signing on the dotted line.
Interest Rates for HELOCs and Home Equity Loans in 2018
In the first few months of 2018, interest rates have been increasing rather quickly. While no one knows what the future may hold, most experts believe that interest rates for home equity loans will continue to rise over the coming 12 months.
So what does that mean for you?
If you have decided to get a home equity loan or HELOC, you might want to get one now. While rates have increased already, they are still relatively low compared to historical benchmarks, and any future increases will make your loan more costly in the long run.
However, interest rates tend to fluctuate significantly, so it’s possible that experts could be wrong and rates could come down again in the near future.
Approval Rates on HELOCs and Home Equity Loans in 2018
It’s not always easy to get approved for a home equity loan or HELOC. If you’re planning to get a home equity loan, you should understand how to get approved. First of all, you must have enough equity in your home to even qualify. That usually means the balance on your outstanding mortgage(s) must be less than 80 percent of the value of your home. If it is higher than 80 percent, most lenders will not approve you for any kind of home equity loan.
You also typically need to have a debt to income (DTI) ratio of less than 45 percent. This includes all kind of monthly payments, including credit card debt, student loans, and auto loans.
Last but not least, your credit score will determine whether you can get approved for a home equity loan. According to data from Black Knight Financial, if your score is higher than 720 you often have a good chance of being approved. However, if your credit score is lower than 720, it may be difficult to get approved.
The approval process can take a while – usually anywhere from 2-6 weeks. The process of applying for a home equity loan can take a long time\. You shouldn’t expect to get approved immediately.
Alternatives to Home Equity Loans and HELOCs
Every homeowner should understand that there are specific pros and cons of taking a home equity loan or HELOC. While it can be a useful financial tool, it is definitely not a good idea for everyone. Not only does a home equity loan come with monthly payments which can be quite high, it also can put your home in jeopardy if you are unable to pay back the loan for any reason.
Anyone who is researching these loans should know that there are alternatives to home equity loans and HELOCs. For example, if you want money to pay for home improvements, you could always look into getting a home improvement loan, which is a type of personal loan. Or you could get a cash-out refinance, which is essentially a new mortgage that replaces your existing mortgage and allows you to pull out equity from your home.
Here’s how you can use your home equity without having to make any monthly payments.
If you want to unlock home equity without any monthly payments or interest charges, then a home ownership investment might be right for you. You can work with a company like Unison that invests alongside you in the home, sharing in the future change in value of the home. Usually, you don’t need to pay the money back until you sell the home, up to 30 years later.
While 2018 might be a good time to get a home equity loan or HELOC, there are many factors to evaluate before making a decision. You should know how much it will cost you and have a plan for repaying the loan. It’s always smart to research all your options so you can choose the best home equity loan company for you.
Also remember that while it might be convenient to tap your home equity, it should not be used as a short-term financial band aid. If you are already facing serious financial problems, seek help from experts before taking out a loan that could potentially put your homeownership in jeopardy.
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