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By Pam Leibfried
You’ve worked hard to build up the equity in your home, and now you want to tap into it to make a big purchase or to renovate your home. You’ve got a few options, two of the most common being a home equity loan or line of credit and a cash-out mortgage refinance. But how do you choose which option is best for you?
First, the basics:
Home Equity loans. There are two types of home equity lending: a home equity loan and a home equity line of credit (HELOC). A home equity loan gives you a lump-sum payout, while a HELOC gives you a line of credit that you use as you need it, but that you don’t have to access all at once.
Pro tip: Alliant offers Interest-Only HELOCs for members who need funds over time and want to keep their payments lower now.
Cash-out refinance loans. With a cash-out refinance, you are basically taking out a larger mortgage and getting a cash payout for the amount your loan increases. For example, say your home is worth $400,000 and you currently owe $200,000 on your mortgage. If you need $100,000 for an addition to your home, you could do a cash-out refinance to get a new $300,000 mortgage and get the $100,000 in cash for your addition.
The tax reform law passed in December made changes to the deductibility of mortgage interest, but not to the extent that many people think. The interest on a new home equity loan, HELOC or cash-out refinance loan may still be deductible for you. (Note: Every person’s tax situation is different and I am not a tax professional, so before you make a decision, you should talk to your tax advisor!)
Generally, if the money you’re borrowing is used for home improvements, the interest may still be deductible, but there are new dollar limits to how much of a deduction you can claim, so consult your tax attorney before you make any decisions based on tax deductibility.
You may be thinking that I sound like a broken record by saying again that you should consult with experts, but there’s a reason for that: The above considerations and their many variables are very complicated. So before you pull the trigger on either loan type, you should talk to a mortgage pro and your tax advisor to confirm how each option will affect you in terms of your payments and the deductibility of the interest you pay.
Pam Leibfried is a marketing content specialist whose love of words led to a writing and editing career. After a brief stint teaching English, she transitioned to corporate communications and spent 20 years at The Nielsen Company before joining Alliant’s content development team. Early in her work life, Pam’s friend Matt explained the benefits of a 401(k) and her dad encouraged her to start a Roth IRA. Their good counsel prompted her to prioritize retirement savings, which just might enable her to retire early so she can read more and live out the slogan on her fave T-shirt: “I have a retirement plan: I plan on quilting.”
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