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MORTGAGE KNOWLEDGE CENTER

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HELOC LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

  1. Home
  2. Mortgage Knowledge Center
  3. What are all of the ways a HELOC may be tax deductible?

General Information

What are all of the ways a HELOC may be tax deductible?

What You'll Learn: How a HELOC works, how it can be used to get you a tax deduction.

EXPECTED READ TIME:4 minutes

July 11, 2023

What are all of the ways a HELOC may be tax deductible?

If you need to make renovations and have equity in your home, a Home Equity Line of Credit (HELOC) might be a great solution. However, not all expenses purchased with HELOC funds are tax deductible. To maximize the funds from your HELOC, consider these conditions and qualifications before getting started and consult a tax adviser for further information regarding the deductibility of interest and charges.

How does a HELOC work?

With a HELOC, you can use as little or as much money as you need and only pay back what you use. The funds work a lot like a credit card; however, your borrowing limit is based on the amount of equity you have in your home or the amount you have already paid off.

Unlike a credit card, HELOCs have a set draw and repayment period. This means you can only take money out during the draw period where you will then only be required to make interest payments on the loan. At the end of the draw period, you must begin repayment on the full loan amount including the new principal and interest.

Keep in mind, a HELOC is also a variable-rate loan with fluctuating interest payments that may impact your monthly payments. Before opting for a HELOC it is important to understand the pros and cons, or you may end up taking on more debt than you planned.

Despite its many guidelines, a HELOC can be a smart financial decision when undergoing substantial and costly renovations as they usually have lower interest rates than a personal loan or credit card.

What are the types of projects that qualify for tax deduction?

In 2017, the laws for HELOC tax deductions changed and qualification became dependent on how you plan to spend the funds. According to the IRS (Internal Revenue Service), the interest you pay on your HELOC might be tax deductible, but only if the funds are used to “buy, build, or substantially improve” your home. This means a HELOC is not tax deductible if you use the funds to pay for personal items like the purchase of a new car or debt consolidation.

The rules are clear; transactions are only tax deductible if you plan to undergo major renovations on the home. An example of this would be, if you took out a HELOC for $20,000 and only used $15,000 for home upgrades and used the other $5,000 to consolidate debt, you would only be able to deduct the $15,000 you used for the home upgrades.

Lastly, renovations only qualify for tax deductions when made on the property in which you are taking out the loan. You are not qualified to use the funds to renovate a second home, rental, or vacation property. 

Which home improvement projects qualify for tax deductions?

Keep in mind, qualifiable home improvement projects are described as “permanent alterations made to a home that increase its value,” repairs do not count. Make sure you understand the difference between an improvement and a repair before using any funds. Here is a list of common home improvements that qualify for tax deductions.

  • Replacing an HVAC system
  • Energy-efficient improvements
  • Resurfacing your driveway
  • A new roof
  • Decks and porches
  • Home improvements for medical purposes
  • Installing insulation
  • New windows
  • Plumbing and electrical
  • Swimming pool
  • Additions
  • Adding a bathroom

Which documents and records are required for tax submission?

It is a good idea to keep an itemized expense report and a record of your bank statements while using HELOC funds. While it is not often the IRS conducts an audit, you still don’t want to take any chances. Maintaining records is also the only way to qualify for tax deductions which maximize your borrowing potential and add the most value to your home.

Save Documents

Documentation is important before beginning any home improvements or renovations. Be sure to create a digital folder and save all itemized receipts and important documents like contracts and written statements throughout the duration. You will need itemized receipts to receive any tax deductions.

Speak to a tax professional

Tax regulations can be difficult to understand and are constantly changing. Consulting with a tax professional can help maximize your savings and deter any legal recourse.

Consult with a real estate professional

Not only will a real estate professional have basic knowledge regarding tax-deductible home improvements, but they will also know which home improvements can offer the most return on investment, as well as projects trending in your neighborhood.

Still have questions?

With the help of a tax professional, you’re well on your way to maximizing the equity in your home. Just remember, there are many considerations to make before you begin, and having a plan in place will help you qualify for more tax deductions to invest right back into the value of your home.

For more information about PenFed Mortgages:
 

PenFed Mortgage: 

800-970-7766

Get Started

SIMILAR ARTICLES

What Is a HELOC? | PenFed Credit Union

Wondering what exactly a home equity line of credit is? Here's a closer look at what homeowners should know about taking out a HELOC.

Couple calculating a budget together.

What Are the Pros and Cons of a HELOC? | PenFed Credit Union

Find out what you need to know about earnest money deposits, including how much you'll need, how much to put down, and if you'll get your money back if the deal falls through.

Couple looking over documents

10 Ways to Use the Equity in Your Home to Your Advantage | PenFed Credit Union

Using the equity in your home can be a smart financial move. Check out the top 10 reasons many homeowners consider a home equity loan or line of credit to reach their goals.

files and binder on a desk

Top 10 Benefits of a HELOC | PenFed Credit Union

Get your home loan financing questions answered, including: Can I afford a mortgage? How much home can I afford? Can I afford to buy a home?

Houses in neighborhood
image

HELOC LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Home Buying Steps

  • Getting Started
  • Finding a Home
  • Getting a Mortgage
  • Home Ownership

Mortgage Topics

  • VA Loans
  • Conventional Loans
  • First Time Homebuyer
  • Home Equity
  • Homebuying 101
  • Checklists
  • Adjustable Rate Mortgages
  • PenFed Top 10
  • Refinance
  • Jumbo Loans
  • FHA
  • Videos

Mortgage Products

  • Mortgage Center
  • Refinancing
  • Home Equity

PenFed HELOC

Rates as Low as % APR* with flexible use of funds

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Disclosures

1Prime Rate is % as of . The APR for this Home Equity Line of Credit (HELOC) is based on prime plus a margin and can change monthly. Fixed Rate Advances will be amortized over the Fixed Rate Advance Term, with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin, and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes.

  • Annual Fee: Notwithstanding the foregoing, an annual fee of $99 will be assessed on each account anniversary.
  • Home equity lines of credit (HELOC) are variable rate loans and the interest rate is subject to increase after consummation of the loan on monthly basis. Closing costs range between $500 and $8,500 for credit lines of $500,000. Contact a representative for additional details.

Appraisals: PenFed will attempt to establish value via an independent method. If that method is unsuccessful, or the value is not sufficient for the amount requested, an appraisal will be required regardless of CLTV. An appraisal is always required in the following circumstances:

For all loans with a loan amount greater than $400,000.

If an appraisal is required, it must be ordered by PenFed. You will be contacted for authorization and payment prior to ordering. Appraisal fees average $550 to $850 (some run higher).

  • Closing Cost Credit: PenFed will pay most closing costs associated with a home equity line of credit (HELOC), which includes credit report, flood certification, settlement/closing, property ownership and encumbrances search, recording, property search, and quick close. Member is responsible for any city, county, and/or state taxes if the subject property is located in FL, LA, MD, MN, NY, TN, or VA. If an appraisal is required, the member, who is responsible for the fee whether or not the loan closes, will pay the cost.

Interest may be tax deductible, consult a tax advisor for further information regarding the tax deductibility of interest and charges.

Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Advance Period. During your Advance Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.

Fixed Rate Advances will be amortized over the Fixed Rate Advance Term with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes and 4.75% for investment properties.

Property Insurance: Property insurance is required.

Multiple PenFed Loans: Multiple PenFed Equity loans and HELOCs are available as long as the member and collateral qualify (except Texas). For Equity loans and HELOCs the total indebtedness cannot exceed $500,000 for all PenFed Equity and HELOCs combined.

PenFed does not lend on:

  • Mobile homes
  • Co-ops or time-shares
  • Properties that are currently listed on the market for sale
  • Commercial property or property used for commercial purposes, even if a residence is part of the property
  • Undeveloped property (land only)
  • Properties with more than 4 units

Properties that are currently under major construction/renovations: Property must be fully livable, with no safety issues. (Examples: no missing rails from stairs/decks, no open walls with wires showing, missing kitchen appliances/counters, missing bath fixtures or unfinished pool).

  • Additional limitations may apply

Home Equity Line of Credit:

  • This Account has a Draw Period of 10 years, followed by a repayment period of 20 years.
  • If only minimum payments are made during the draw period, the loan balance will not decrease.
  • In Texas, the maximum CLTV available is 80% on owner occupied properties. Additional restrictions apply in Texas, so please ask a representative for details.
  • In all other states, the maximum CLTV is 85% on owner occupied properties and second homes. Additional restrictions or requirements may apply based on application characteristics.
  • Property type of Condo has a maximum CLTV of 80%.
  • The maximum CLTV available is dependent on credit qualification.
  • Rates vary depending on owner occupancy and CLTV and other loan criteria.

Minimum Loan Amount Requirements in all States:

  • For an owner occupied property or second home the minimum loan amount is $25,000 and the maximum amount is $500,000 with a CLTV of 85% or less of the fair market value.

Other terms and conditions apply; call 844-918-4307 to speak with a representative for details. All rates and offers are subject to change without notice. To receive advertised product, you must become a member of PenFed.

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This credit union is federally insured by the National Credit Union Administration. Rates are current as of October 2023 unless otherwise noted and are subject to change.

APY = Annual Percentage Yield
APR = Annual Percentage Rate


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You are leaving PenFed.org and entering a third party Website that is not a part of Pentagon Federal Credit Union.


The content you are about to view is produced by a third party unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Realty, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Realty, LLC, see the Affiliate Business Arrangement Disclosure.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party Website.


The content you are about to view is produced by a third party website that is unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Title, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Title, LLC, see the Affiliate Business Arrangement Disclosure.


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