See: HELOC Worksheet

To put it simply: If your HELOC was used to improve your home, you may deduct interest on lines up to $1 million ($500,000 married filing separately). If your HELOC used for other purposes, you may deduct interest on lines up to $100,000 ($50,000 married filing separately). Read more… 

See Also:

How the Home Equity Line of Credit Came to Be

Taking a HELOC Tax Deduction

There are two factors to consider when facing foreclosure:

First, HELOCs are subordinate to primary home loans. This means that the HELOC lender has claim to any money generated by a foreclosure, only after the primary mortgage lender recoups their full loss. The primary mortgage lender will also use up thousands of dollars to sell the foreclosure home. In many cases, this means that the HELOC lender will not see any money when a property is foreclosed upon.

Second, almost all HELOCs are considered “recourse loans.” The borrower is personally responsible for paying recourse loans in full, regardless of their property’s value. Read more…

Applying and opening a HELOC will give your credit score a ding. However, you may be able to increase your score significantly by transferring your credit card debt to your home equity line of credit. How much your score will improve depends on the limit of your credit line. Lower limit HELOCs are generally recorded as revolving lines of credit when determining a borrower’s FICO score. Higher limit HELOCs are generally recorded as mortgages or installment loans.

Read more: Will Paying Off Credit Cards with a HELOC Improve My Credit Score?

If you’re trying to decide how to borrow, take a look at this chart illustrating the most important differences between home equity loans and home equity lines of credit.

Applying and opening a home equity line of credit will give your credit score a ding. However, you may be able to increase your score significantly by transferring your credit card debt to your home equity line of credit. How much your score will improve depends on the limit of your credit line. Lower limit HELOCs are generally recorded as revolving lines of credit when determining a borrower’s FICO score. Higher limit HELOCs are generally recorded as mortgages or installment loans. Learn more…

Fortunately, HELOC borrowers are legally permitted to back out of a deal if they notify the lender within three business days. Borrowers do not need to have a reason for backing out; they simply need to inform the lender in writing.

The right of rescission is only available if the home equity line of credit is secured by the borrower’s primary residence. In some cases, the rescission period may be waived if the borrower can prove the money is needed for an emergency.

For more information on the HELOC right of rescission see: Home Equity Line of Credit 3-Day Right of Rescission.

The U.S. EcoMonitor recently published a very worthwhile article detailing the history of the home equity line of credit and explaining how the nation entered the current mortgage crisis.

Here are the basics:

“The federal and many state governments promoted what is generally regarded as the social good of home ownership by providing a tax deduction for interest paid on mortgage loans. Prior to the Tax Reform Act of 1986, however, governments also permitted taxpayers to deduct almost any other kind of interest they incurred as well and the credit card companies and other consumer lenders naturally benefited, as their “product” (unsecured credit, auto loans, student loans, etc.) was this made cheaper to the consumer. After the non-mortgage interest deduction was phased out in the early 1990’s, a new financial product came over the horizon – the Home Equity Line of Credit, or HELOC. At first, the HELOC was designed to solve the problem created by the elimination of interest deductions on consumer loans. Simply grant a lender a second mortgage on your home and suddenly, as long as you had less than $1 million in total home loans, you could deduct all of the interest on what really was a personal line of credit.”

It’s amazing how a small piece of legislation could have such a lasting effect on the economy and the public’s view of homeownership.

See Also:

HELOC Tax Deductions

How a HELOC Works

BusinessWeek reports that many borrowers are using their home equity loans to pay for school - even if it’s just out of convenience:

“A forthcoming survey by student-lending giant Sallie Mae and research firm Gallup reveals for the first time just how heavily families have depended on those costly forms of credit. Although 77% of students and 36% of parents tapped into federal funds, both groups usually turned to other sources to supplement that money—sometimes unnecessarily. Some 19% of parents who borrowed money charged tuition on a credit card, while 20% relied on home-equity loans, taking out $10,854 on average.”

Most students attending accredited colleges qualify for low-rate federal loans. Some are even be able to receive grants or scholarships.

There are many smart ways to use a HELOC (funding necessary home repairs, for example). However, withdrawing borrowed money for school generally sticks parents with a high interest rate and puts their home on the line.

Before joining the 20% of parents who use home equity lines for college tuition, talk with a college financial aid counselor. A quick conversation could save you thousands.

See Also:

5 Financially Sound Ways to Use Your HELOC

Is a HELOC Right for You?