Home Equity Lines of Credit and Tax Deduction

Home Equity Lines of Credit

Home equity lines of credit offer many benefits, and one of the most important is the tax deduction that you may be eligible for on the interest you pay on any balance due with this line of credit. This product is different from a traditional loan, because you receive a line of credit up to the specified amount, which you can access at any time and for any reason. A home equity credit line can be tax deductible according to the Internal Revenue Service, as long as it is done correctly and the amount is within the specified limits. Home equity lines of credit can offer a tax benefit that other financial products may not.

With a fixed rate home equity loan you receive the loan proceeds, and then interest at a fixed rate is owed on the entire loan amount from the beginning. In some cases this can cause the interest paid to exceed the limits for the tax deduction. With home equity lines of credit this is not the case, because you only pay interest on the amount you have used from the line of credit. You may be approved for mortgage loans with bad credit, but there again you will need to take the entire loan and then pay usually high interest on it. A line of credit is usually a better choice.

To claim any interest paid on home equity lines of credit as a tax deduction you will need to itemize your deductions on your tax return, Schedule A Itemized Deductions for Form 1040. This line of credit is only one of many options that may be available, and a bad credit home equity loan or other home loan type may be a better choice for some homeowners. For many homeowners a line of credit based on the amount of home equity can be the best choice though, for many reasons.