Dreaming of a Home Improvement Project?

Dreaming of a Home Improvement Project?
Use equity you’ve built in your home to help pay for it

Raise your hand, foodies. We see you – aspiring chefs who like to play “Chopped” in the kitchen on weekends. These days, with so many organic options and easy-to-find foods from far-off lands available, dabbling in the kitchen has become an American pastime.

But that kitchen. The design isn’t very user-friendly, and the countertops look like a scene out of “The Brady Bunch.” A refresh sure would be nice. Paying for it? Not so much.

Home improvement projects like a new kitchen, remodeled bathroom or adding square feet with a major addition can come with hefty price tags. Using your savings, or taking out a home improvement loan to pay for them, are options.

However, what do you do if loan interest rates are high or you lack ample savings? You might still be able to accomplish your home improvement goals if you have built equity in your home, so don’t give up on that dream kitchen.

Using home equity to your advantage

Equity is created by paying down your mortgage. It’s the difference between how much you still owe on your home loan, and the current value of your home.

For example, if your house has a current market value of $250,000, and you owe $150,000 on the mortgage, the amount of equity in your home would be $100,000.

Lenders allow homeowners to borrow against a percentage of the equity, meaning you can use the equity in your home as collateral for a HeLoan (home equity loan) or a HELOC (home equity line of credit). One that could help pay for that kitchen redesign, or another project on your wish list.

Bonus: That dream kitchen may come with tax deductions

Under the Tax Cuts and Jobs Act of 2017, “interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not,” says Irs.gov. ¹

According to the New York Times, “If you take out the loan to pay for things like an addition, a new roof or a kitchen renovation, you can still deduct the interest. But if you use the money to pay off credit card debt or student loans — or take a vacation — the interest is no longer deductible.” ²

Which means, your “Chopped”-inspired kitchen might fit into that deduction category. To be sure, consult with your tax adviser and your lender to confirm that the home improvement project you are considering would be included.

“The easiest way to find out if the interest paid on a HeLoan or HELOC would be tax deductible for your home improvement project is to talk with your tax advisor,” says Alan LaFollette, Vice President, Home Lending at FNBO. “They will be able to find an answer for you.”

Got Questions? Stop by your local FNBO branch today and visit with a mortgage loan expert.

Find a Mortgage Loan Officer

¹ irs.gov – Feb. 21, 2018 – “Interest on Home Equity Loans Often Still Deductible Under New Law” – https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law

² nytimes.com – March 9, 2018 – “Interest on Home Equity Loans Is Still Deductible, but With a Big Caveat” – https://www.nytimes.com/2018/03/09/your-money/home-equity-loans-deductible.html?auth=login-email&login=email