Having a HELOC doesn't prevent you from selling. However, your HELOC balance is repaid from the sale proceeds along with your mortgage, which means less money in your pocket at closing. Additionally, certain scenarios, such as depreciated home values or short sales, can make selling with a HELOC extra challenging.
Having a HELOC won't prevent you from being able to sell your home. You'll need to repay that HELOC before you see any money from the sale of your home. Paying it off early could come with penalties, so review the paperwork you got when you opened your HELOC to see if yours does.
A HELOC allows you to access the equity built up in your primary residence, allowing you to use it for any purpose, including purchasing another house. However, there are potential risks involved when using this approach, including potential foreclosure on your first home if you are unable to pay back the HELOC loan.
The short answer to your question is that the home equity line of credit is unrelated to the potential capital gain or loss on the sale of your home.
If you fail to repay your HELOC, your lender may foreclose on your home and you could end up losing it to the bank. In addition, you will have a negative hit to your credit score, making future borrowing more costly or difficult.
If you have a HELOC and the value of your home tumbles dramatically, your lender could cap your balance — that is, reduce the amount of home equity you can borrow against. And if your home is underwater, your HELOC would probably be frozen and you would no longer be able to withdraw funds from it.
The most obvious downside to a HELOC is that you need to use your home as collateral to secure your loan. In today's rising interest environment, the fact that HELOCs have variable interest rates is also less advantageous, as the Federal Reserve has indicated that it will need to keep interest rates higher for longer.
As such, the amount of HELOC you take out won't affect your property taxes. However, if you use proceeds from the HELOC to finance certain home improvements or upgrades that result in the appraised value of your home going up, then your property taxes could potentially increase.
Home equity loan interest, as well as home equity line of credit (HELOC) interest, can be written off your income taxes when you use the money for home improvement purposes, or to purchase or build a new home.
Itemizing or taking the standard deduction
To deduct the interest paid on your home equity loan (or your HELOC), you'll need to itemize deductions at tax time using IRS Form 1040. Itemizing is worth doing only if all your deductible expenses total more than the standard deduction.
HELOCs benefit most from rate decreases. With the Fed looking to lower rates in 2024, a HELOC may be more beneficial than a home equity loan because the rate could go down. Also, with a HELOC, you can draw funds as you need them, and you only have to pay interest on the funds you actually take out.
A home equity loan or home equity line of credit (HELOC) is a loan used to pull equity out of a first home to fund the down payment of a second home. Other sources for finding money for a down payment may include tapping into a retirement account, doing a cash out refinance, or borrowing from family and friends.
HELOCs are generally the cheapest type of loan because you pay interest only on what you actually borrow. There are also no closing costs. You just have to be sure that you can repay the entire balance by the time that the repayment period expires.
For instance, if you close a HELOC before three years has elapsed, you may pay a 3 percent penalty or you could be charged a 5 percent penalty for closing a HELOC before the five-year mark. Some lenders may opt to charge a flat fee for early termination, which usually amounts to a few hundred dollars.
Whether you plan to pay off your HELOC when you sell your home, are refinancing, or experience a financial windfall, a prepayment penalty could be an unexpected charge. Most prepayment penalties are about 2% of your loan balance, but the amount varies by lender.
If you're wondering whether you can sell your home if you've taken out a home equity loan, the short answer is yes. You can sell your home after a home equity loan — even if you haven't started repaying the money yet.
HELOCs can be a good option if you have substantial equity in your home and you know you'll need access to cash with some regularity over a period of time — college tuition bills over the course of several years, for example.
It can have a small impact on your credit score when you apply for one, but a larger one if payments are late or missed. As additional debt, it can ding it — but can also boost it as an enhancement of your total available credit.
When it comes to mortgage interest, the IRS treats HELOCs and home equity loans in a way similar to how they treat cash-out refinancing. If you use the money you borrow with a HELOC to make home improvements, you might be able to deduct the interest you pay on the amount you borrow, again up to a $750,000 limit.
The bottom line
If you want to take a home equity loan tax deduction on your 2023 tax return, you'll need to open the loan before the deadline. Remember, though, that you can deduct interest payments as long as the money is used to improve the home used to take out the loan.
With a home equity loan, you receive the money you are borrowing in a lump sum payment and you usually have a fixed interest rate. With a home equity line of credit (HELOC), you have the ability to borrow or draw money multiple times from an available maximum amount.
Calculating the monthly cost for a $50,000 loan at an interest rate of 8.75%, which is the average rate for a 10-year fixed home equity loan as of September 25, 2023, the monthly payment would be $626.63. And because the rate is fixed, this monthly payment would stay the same throughout the life of the loan.
While having an unused HELOC can be advantageous in many ways, it's essential to be aware of the potential costs. Some HELOCs come with annual fees or maintenance fees, which you might still have to pay even if you don't use the credit line. The fees you could incur, even with an unused HELOC, include: Inactivity fees.
In October of 2023, Bankrate data showed rates were averaging 8.75 percent on home equity loans and 9 percent for HELOCs. There is one bright spot, though: If you use a HELOC or home equity loan for housing-related repairs or remodels, the interest can be tax-deductible. That can reduce the real cost of your financing.