Home equity loans provide Americans with a way to finance their dreams using the equity that has built up in their home. They also provide American homeowners with a substantial tax break.

Unlike consumer loans, which are not tax-deductible, the interest paid on home equity loans up to $100,000 is tax deductible.

Many homeowners use home equity loans to finance vacations, home repairs or to pay off high-interest debt (from credit cards, car loans and department store credit cards).
(See below for more information.)

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The loan is calculated at a lower interest rate, the payments are lower and the tax break allows them to:

• Pay lower taxes at the end of the year.
  
  
• Lower the overall cost of what they use the loan to buy.
  
  
• Pay the home equity loan off a little faster (if they are wise).
  

Homeowners approved for a home equity loan can deduct the interest they pay on a loan up to $100,000. If they pay $3,000 in interest, they can deduct $3,000 from their tax return. If they pay $5,000, they can deduct $5,000. The money they borrow – and hopefully the tax refund they receive – can be used for any purpose: to pay for college tuition, to buy a new RV or to pay off debt.

The benefits are even greater for homeowners who use loan funds to improve their home. Homeowners who use a home equity loan to pay for home repairs or renovations can deduct interest paid on loans as high as $ 1 million. That’s a considerable tax break!

Tax restrictions are slightly tighter for people who borrow beyond the appraised value of their home. In this case, the tax deduction is capped at the interest paid on the loan up to the home’s fair market value. That means that although a homeowner may qualify for a $45,000 home equity loan under the 125 percent loan-to-value program, their tax deductible interest will be limited to interest paid on a $20,000 loan – the available equity.

A home equity loan can be a smart way to clear up debt or pay for essential home repairs. It is also a serious financial commitment to be considered carefully. Speak to your tax advisor or use a Schedule ‘A’ form from the IRS to calculate the potential tax benefits and remember – a tax deduction is of no use if you cannot afford the loan payments.