Home Equity Loan Interest - what can you deduct on Your Taxes

When it is tax time, it is scary for many people as the deadline nears. Reviewing and identifying all of the possible deductions and falling up short of eliminating your tax payment entirely can be a frustrating experience. However, most people are not fully aware of their possible deductions on your home equity loan interest on your taxes?

When you finance any type of loan – be it for your home, your car or a new couch from Sears – you pay interest on the principle of that loan. Loans taken out before October of 1987 on homes are subject to home equity interest tax deductions, which can be your saving grace. Although there are a few restrictions (described below), most people are elligible for this tax deduction.

First of all, you can only deduct home equity loan interest if the mortgage is on your first or second home. This might seem like no big deal, but if you have multiple vacation homes or an excess of real estate investments, those home equity loans do not apply. Further, you cannot deduct interest that is more than the total value of that home. You can read IRS Publication 936 for more information on whether or not your home equity loan qualifies.

In most cases, you are also only allowed to deduct home equity loan interest from the first hundred thousand dollars you have mortgaged. For example, if you purchase a $240,000 home, you can only deduct equity loan interest from the first $100,000, but not the second $140,000. There are a few exceptions to this rule, such as home imprivements, but they are rare.


It is also possible that you will not be able to deduct certain amounts this year, but will have to wait until subsequent years because of amortized payments. For example, if you’ve had your home for nine years, and then take out a second mortgage, you will have to pay points toward that second mortgage. However, that doesn’t mean that you can necessarily deduct those points during the year that you paid them; you might have to wait until they are amortized over subsequent years. However, once your loan has ended, you can deduct all remaining points in that year. You can find more specific information regarding this matter in Publication 936.

In order to deduction your home equity loan interest on your taxes, you will need to itemize your deductions on the Schedule A form, as long as your tax deduction exceeds that of the standard deduction ($4,300 for singles; $7,200 if you are married).

On Schedule A, you will have to provide the name of the company through which you have secured your home equity line of interest as well as the amount of interest you have paid in that tax year. If you have any questions about this process, seek the counsel of a qualified CPA to make sure that you are filling out all of your forms correctly.

Best Line of Credit (HELOC) Interest Rates

The rates Home equity lines of credit are getting higher and higher and will continue next year as well. If you do not have one already, this is a good time to lock in one if you qualify!

A few months back, a lot of lenders were offering HELOCs with rates of less than 4%. Now only a few of them have deals that are good, and most borrowers will pay a minimum of 4.25%.

The HELOC’s are based on the prime rate — the interest rate banks charge the best commercial customers. This is currently at 3.25%.

The days when we got HELOC rates of Prime rate minus something are gone. Most of the home equity lines of credit are priced around prime plus 1%.

But if you have enough equity in your home, HELOC’s are the best loan you get with the cheapest interest rates.

Here are some of the better deals around:
US Bank, which serves 24 states nationwide, has rates as low as 3.99% and as high as 9.25% in parts of Arizona, California and Nevada – states that have suffered steep declines in home prices. You’re also tagged with a $90 yearly fee.

Third Federal Savings & Loan is charging 3.25% for homeowners in 18 states from Oregon to Florida for loans up to $49,999. For loans of $50,000 – $150,000, you pay only 2.99%. They used to do business in California…not anymore! There’s no annual fee.
BB&T Company, headquartered in Winston-Salem, N.C. with 1,500 financial centers in 11 southeastern states and Washington, D.C., charges 4.25% with no fee and a $5,000 minimum.
Nationwide Bank, owned by Nationwide Insurance, is charging 4.50% with no annual fee.
Viewpoint Bank based in Plano, Texas, with 39 branches serving the north part of the state, offers 4.5% with no annual fee and a $4,000 minimum.
First Tennessee Bank, owned by First Horizon National Company, with branches in Arkansas, Georgia, Mississippi, Virginia and Tennessee, charges 4.25% with a $5,000 minimum and a $50 annual fee.

To qualify for one of these HELOCs you need:
A credit score of around 660 or more, with the exception of Nationwide Bank and Third Federal Savings, which require a minimum score of 720.

To retain 20% equity in your home after the line of credit is added on to the balance of your primary mortgage.