Consolidating your debt is actually a process in which you funnel all of your debt balances into one single loan account that will carry a lower interest rate and probably an extended tenure. This will reduce your monthly payments and your worries as well as enable you to save money and pay your bills off on time and more quickly. The different options of debt consolidation include:
- A personal loan: You can take it from a traditional bank or any other lender. These are normally unsecured loans just like your credit card. It is unsecured because it does not require any collateral backing. As a result, the rate of interest may not be always appealing in comparison to other products but you can shop around a bit and trike a better deal.
- Balance transfer: Especially for multiple credit card debts, you can opt for a zero-interest balance transfer. However, you will need an excellent credit for this and also have enough resources to pay it off within the stipulated time limit so that you prevent the high rate of interest from kicking in once the time limit expires.
- Home equity loan: Browsing through different loan options you will come across a few such as refinancing your mortgage to get some extra cash or establish a Home Equity Line Of Credit called HELOC. You may secure a home equity loan in which you may get a lump sum of cash depending on the value of your house and pay it back in equal monthly installments. Since the average loan rate of home equity hovers around 5.75%, you can enjoy the low interest advantage for these equity based products.
If you are a homeowner facing the wrath of carrying too many debts in your name, then the first and safest option that you may want to choose to pay off your multiple debts is by consolidating your debts with a home equity loan just like several other homeowners.
It is true that this is a viable and prudent option to choose provided you know about the pros and cons as well as the tax implications it may have according to the new tax laws. That is why it is always recommended that you go through several debt consolidation reviews and other options before you finalize.
Knowing the new tax rules
As a homeowner you must get everything done perfectly right from the very beginning so that you do not put your property at risk or losing or get its value reduced. For this you will need to know the changes in the tax code about deductions. Customarily, when you buy a home you will automatically enjoy a few tax relief benefits. However, with the new rules coming into force the days of reducing mortgage interest rates or property taxes are over for some homeowners.
However, there is nothing to panic as this does not mean your taxes will go up. Here is a closer look at the various impacts the new tax laws may have on deductions if you choose for a home equity loan to consolidate your debts. This knowledge will enable you to know what you can expect from such an approach.
- Standard deduction is an aspect that has changed completely. Previously, the mortgage interest charged on any mortgage up to a $1 million balance was considered as deductible enabling the homeowners to enjoy almost unlimited deductions in property taxes. This gives rise for itemizing as that will drop the mortgage interest by more than 56%. Though this does not mean that you will have to pay more taxes on the remaining balance but you may not necessarily have a tax deduction for the mortgage on your home.
- However, home equity borrowing for debt consolidation can prove to be a good financial move. All you have to do is consider it in a different way. You will need to consider the new home equity parameter which is probably the biggest change in the tax code in this regards. These parameters allow you to deduct a certain amount of interest on home equity loan but only in specific situations. According to the new law, you cannot deduct the interest on home equity loan unless you use it buy, build, or improve your home substantially. That means you will now not get the added benefit of tax deduction when you use it for consolidating your debts or pay up your student loan.
- There are also a few specific changes made in the allowance. According to the law, if you take out a home equity loan to serve numerous purposes previously the deductions were distinct from what you claimed on your first mortgage. For married couples filing jointly are now allowed a new maximum allowance of $750,000 only instead of the previous $1 million limit. Since most of the mortgages fall within this limit it will affect your deductions as well. In some cases the ‘grandfathering’ rules will apply. It is best to contact a tax professional to know the specific details and your situation so that you can determine which the best approach is and how much amount of debt will qualify for any interest deduction.
- Moreover, when the standard deduction is nearly double the new tax law reduces the ability of a homeowner to ask for an itemized deduction for their real estate property taxes under the state or local jurisdiction. The new State And Local Property Taxes or SALT when combined will not allow you to deduct more than $10,000 in your tax return and for married couples filing separately this limit is as low as $5,000. The impact of such changes will vary according to your state of domicile. It will be high if you live where property taxes and income are higher.
The new tax law has also impacted the energy tax credits as that start shrinking and on capital gains as all will be subject to tax. Therefore, speak with a financial adviser or a tax professional to know whether home equity loans for debt consolidation is a feasible choice for you.