May
13
2024
Corporate Social Responsibility (CSR), Explained
What is corporate social responsibility — and does it matter for your investment strategies? Read on to learn more.
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Student Loan Consolidation and Refinancing
May
13
2024
What Is Accrued Interest? Everything You Should Know
Accrued interest represents the interest that accumulates in between payments on a financial product. Accrued interest can apply to both lending and investment products, ranging from home loans and credit cards to bonds or savings accounts.
Accrued interest is different from regular interest, and it’s an important concept to understand.
What Is Accrued Interest?
When you are investing and earning interest, you’ll probably encounter accrued interest. And in the opposite situation, if you borrow money and owe interest payments, you’ll also deal with accrued interest.
This type of interest accrues in between payments. For instance, if you have a credit card balance of $1,000, and you make a partial payment on the 30th of the month, the remaining balance and any new charges will begin to accrue interest. It will be due on the 30th of the following month.
Think of accrued interest as interest that is building up, bit by bit, until that payment is made. In the case of an investment like bonds, in which you’re essentially loaning money to an entity like the government or a company, the accrued interest is interest earned on the money you invested that is eventually paid to you.
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How Does Accrued Interest Work?
It’s possible to owe accrued interest on a variety of lending products, like credit cards and loans. It’s also possible to earn accrued interest on certain investing products and savings accounts.
Whenever an individual borrows money, they owe interest. They are paying to use that money. On the flip side, when they are investing and giving a financial institution, government agency, or company money to borrow for an investment, such as a bond, then the individual is owed interest.
Accrued Interest When Borrowing Money
When you borrow money, with an installment loan, for instance, interest typically accrues daily. At the end of the month, the accrued interest is added to the total monthly payment amount.
With credit cards, unless you pay your balance in full every month, the same daily accrual happens after the cardholder makes a charge with their card. The interest is building up as the month goes on. How much interest accrues depends on the balance and the interest rate.
Accrued Interest When Saving
Accounts that earn interest, such as certificates of deposits (CDs) and high-yield savings accounts, also often accrue interest daily. The amount of interest accrued is based on the account’s average daily balance. An exception to that is bonds, which generate a fixed interest payment on a quarterly, semiannual, or annual basis.
How to Calculate Accrued Interest
How interest accrues varies by the lender and product that’s generating the interest, which could be a loan, a line of credit, an investment product, or a bank account such as a savings account.
Example of Accrued Interest When Borrowing
To calculate how much interest will accrue daily with a credit card, for example, an individual needs to divide their APR (annual percentage rate) by 365 (for the number of days in a year). Then, they would multiply their current credit card balance by their daily rate. So if a credit card has an APR of 24.37% with a balance of $500, the calculation for how much interest accrues daily looks like this:
24.37 / 365 = 0.067%
$500 x 0.00067 = $0.34 interest that accrues daily
To calculate the monthly interest charge, multiply the daily rate by the number of days in the credit card billing cycle. So if there are 30 days in the billing cycle the calculation would look like this:
$0.34 x 30 = $10.20 in interest
Although credit card interest accrues daily, the total amount accrued is typically not added to your balance until the end of the billing cycle. So if you pay your balance in full by the due date, you can avoid paying accrued interest.
Example of Accrued Interest When Saving
To calculate accrued interest on a savings account, for example, take your yearly interest rate, which banks generally list as an APY, or the percentage of total interest you can earn on your account per year. To find the monthly interest rate, divide the APY by 12 (for the number of months in the year). So, if the APY is 5%, the calculation would look like this:
5 / 12 = 0.416% monthly interest rate
Next, to calculate how much interest you will actually earn on your money, you need to know if the interest is simple interest vs. compound interest. Most savings accounts use compound interest, and it is calculated depending on how often it compounds, such as monthly.
To determine how much annual interest you’ll earn on a balance of $1,000 in your savings account, the formula is:
P(1 + R / N)˄NT
P is the principal amount (the $1,000), R is your APY (calculated in decimal form), N is the frequency of compounding, which is monthly, and T is the amount of time, which in this case is 1 for one year. It would look like this:
1,000(1+ 0.05 / 12)˄12 x 1 = $1,250
💡 Quick Tip: If your checking account doesn’t offer decent rates, why not apply for an online checking account with SoFi to earn 0.50% APY. That’s 7x the national checking account average.
Accrued Interest vs Regular Interest
Accrued interest is different from regular interest. Accrued interest typically indicates interest charges that have accumulated but not yet been paid. Perhaps you have heard the term in this context with student loans: The interest may start accruing (adding up) when the loan is disbursed, but it could only become due at your studies’ completion. You may not be paying the interest just yet, but you can know the interest will be assessed.
Regular interest refers to the interest earned on, say, a home loan. Your payment plus interest is due on a certain date and is not accruing day after day or varying. The “regular interest” involves a known principal and interest rate, as well as a constant monthly payment that is due every month.
Why Is Accrued Interest Important?
Accrued interest shows how interest that an individual owes or is owed adds up. For example, with bonds, it may help you understand the interest that’s accruing so you can make sure you are earning the right amount. Or, if you have borrowed money, you can look at how the accruing interest could add to the amount you owe, which might, in turn, help you manage your money.
In the case of a credit card, if an individual sees how long it will take to pay off a credit card balance over a year or two, they could crunch the numbers on how much interest they will accrue during that time. They may find that paying the debt sooner could save them a lot of money, and then work to create a budget to help them pay down what they owe.
Understanding how that interest builds up is a valuable tool. By better comprehending how much you owe or are owed, you can manage your money and work to enhance your financial health.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
Is accrued interest good or bad?
Accrued interest isn’t necessarily a bad or good thing. If someone borrows money, they may not enjoy paying accrued interest, but it is a part of their lending agreement. On the other hand, if someone earns accrued interest on investments or savings, they’ll probably consider it a good thing.
Why do I have to pay accrued interest?
Paying accrued interest is more often than not necessary when someone borrows money. Those payments are required by lenders in exchange for lending money to consumers.
What is the difference between interest and accrued interest?
Regular interest represents the payment made in exchange for borrowing money or as a form of income earned from an investment. Accrued interest represents the amount of interest that builds up in between payments.
How do you avoid accrued interest?
When an individual enters a borrowing agreement, they need to pay any interest they accrue. That said, there are ways to avoid paying accrued interest altogether or to minimize accrued interest payments. For instance, pay your credit cards in full. When you pay the balance in full, you won’t have to pay any accrued interest.
Also, to minimize how much accrued interest you owe on a loan, you can make additional payments. Paying down the principal faster will lower how much interest accrues on a monthly basis. You may even be able to pay off the loan early, which also helps avoid more interest accruing.
Photo credit: iStock/MicroStockHub
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
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Read moreMay
13
2024
7 Ways to Use a HELOC to Build Wealth
The average homeowner with a mortgage ended 2023 with $299,000 in home equity, according to ICE Mortgage Monitor, which also estimates that the average funds homeowners could tap by borrowing against their home equity is $193,000.
Obviously, that number varies for each individual and depends on factors such as the original down payment, local property values, and the amount of time in the home. But if you have more than 20% equity in your home, using a home equity line of credit (HELOC) to build wealth is a strategy to consider.
Ways to Build Wealth With a HELOC
A home equity line of credit lets you borrow funds as needed (up to a prearranged limit) through a credit draw. This is different from a home equity loan, in which you would borrow a one-time sum of cash. Drawing on your home equity for certain expenses could help grow your wealth over time, if it financially makes sense. Here are some options to consider.
1. Home Improvements
A HELOC works well for larger home improvement projects and renovations because you can draw funds to pay for materials and contractors as needed. You accrue interest only on the outstanding balance, so it could be cheaper to opt for a HELOC vs. a home equity loan. And if you itemize your taxes, you could deduct HELOC interest payments when the money is used to improve the home.
Plus, a renovation project could build wealth by increasing the value of your home. Home improvement experts estimate that a kitchen refresh could deliver a 377% return on investment and refinishing hardwood floors could have a 348% ROI.
2. Debt Consolidation
You can’t deduct HELOC interest when you use the funds to consolidate debt, but you could still build your wealth. Paying off debt with a lower interest rate could save you a lot of money over the long run. Let’s look at an example.
Say you qualify for a HELOC with an 8% APR but you have a $10,000 credit card balance with a 22% APR. In order to pay off that card in five years, you’d pay $276.19 per month and pay $6,571.35 in interest.
With the HELOC, on the other hand, let’s say you made interest-only payments for one year, then spread out the principal and remaining interest over four years, for a total of five years. During the interest-only period, your payment would be $66.67, followed by $244.13 for the remaining four years. On top of that, you’d only pay a total of $2,518.19 in interest for the entire five years. That’s a potential savings of $4,053.16 in interest payments by consolidating to a lower rate!
3. Real Estate Investments
Using a HELOC to finance an investment property can help you start climbing the real estate ladder. Homeowners could use the funds to make a down payment, cover closing costs, and/or make some upgrades before renting out the property.
You’ll still need to qualify for the new property’s monthly mortgage loan payments, particularly if there isn’t a current rental income history for the lender to review. Assuming you’re eligible for the loan, the goal is to use the rental income to pay off the HELOC and make a profit. On top of that, the property itself could increase in value over time, building your overall wealth.
4. Education and Skills Development
Investing your home equity in your education or skills development could increase your earning power and, consequently, your wealth. Research shows that people with advanced degrees tend to earn more than those without them.
For instance, a study published in Demography revealed that women with bachelor’s degrees earn $630,000 more in a lifetime than those with a high school degree. For men, the increase in lifetime earnings is $900,000. The numbers are even more dramatic with graduate degrees. Women’s lifetime earnings are $1.1 million higher than their high school graduate counterparts, whereas men earn $1.5 million more. Clearly, investing in your professional skills can translate into greater wealth.
5. Start or Expand a Business
The majority of small business owners invest their personal funds in the growth of their companies. Research also shows that upfront funding correlates with greater revenue. So while there’s no way to know that home equity financing you use for your business will guarantee success, it could improve your odds to scale more quickly.
6. Investment Portfolio Growth
Growing a diversified investment portfolio is another option for using a HELOC to build wealth. Obviously, there is risk involved when funding investments. Focusing on long-term investments could help reduce the risk of short-term market volatility. Remember, though, that for investments made with money from a HELOC to truly pay off, you would have to earn more on the investment than you pay in interest for the HELOC.
7. Emergency Fund or Cash Reserve
Most financial experts recommend having three to six month’s worth of savings on hand in cash in case you lose a job or the ability to earn an income. However, the economic volatility that came during the pandemic has people rethinking that number and even recommending up to a year of expenses in savings. Using a type of home equity loan like a HELOC could give you the peace of mind of having a financial cushion to fall back on, while allowing you to carefully invest that six months of savings instead of keeping it in cash.
Turn your home equity into cash with a HELOC brokered by SoFi.
Access up to 90% or $500k of your home’s equity to finance almost anything.
What to Consider Before Getting a HELOC
There are several factors to consider before you decide on a HELOC instead of some other type of financing, such as a cash-out refinance or unsecured personal line of credit.
• Your home is used as collateral: In other words, if you default on your HELOC payments, you could lose your house.
• You must maintain 10% to 20% equity in your home: You can’t tap into your entire equity amount; lenders require you to keep some, which means you may not be able to borrow as much as you originally thought.
• Rates are usually variable: Your interest won’t stay the same and could increase if rates rise. That could mean a bigger balance and bigger payments down the road.
• HELOCs have two stages: The first is the draw period, in which you only have to make interest payments. After the draw period, you’ll make payments on both principal and interest.
Pros and Cons of Taking Equity Out of Your Home
It’s certainly possible to build wealth using a HELOC, but there are advantages and disadvantages to think about.
Pros:
• Low interest rate compared to other financing
• Interest accrues only on the balance, not available credit
• Borrow again when you replenish the credit line
• No restrictions on how you use the money you borrow
Cons:
• Home is used as collateral, putting it at risk
• Payment amount increases after draw period is over
• May come with closing costs and maintenance fees
The Takeaway
Tapping into your home equity using a HELOC is one way to potentially build wealth, especially because rates tend to be low when compared to other forms of borrowing. It’s always worth weighing the pros and cons, since defaulting on payments could result in losing your house. But if you have the financial confidence to move forward, there are several ways that your home equity could help you build wealth.
SoFi now offers flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively low rates. And the application process is quick and convenient.
FAQ
Is it smart to use a HELOC for investment property?
Using a HELOC for an investment property could help you fund the transaction sooner than if you used other types of financing. You may be able to make a bigger down payment or even make an all-cash offer. Just be sure that you feel confident in your real estate market research and your ability to make payments even if a worst-case scenario occurs.
What should you not use a HELOC for?
A HELOC should not be used for depreciating assets, especially when your goal is to build wealth. Things like vacations and car purchases aren’t usually recommended since they don’t hold their financial value.
What are the pitfalls of a HELOC?
The biggest pitfall is that your home is used as collateral to secure a HELOC and can go into foreclosure if you miss payments. On top of that, variable interest rates result in the potential for larger-than-expected payments if rates increase over time.
Photo credit: iStock/nortonrsx
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.
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Read moreMay
13
2024
How HELOCs Affect Your Taxes
When you take out a mortgage, you can deduct the amount of money you pay on mortgage interest from your taxable income. But is home equity line of credit (HELOC) interest tax deductible, too? Put simply, it depends on when you took out the HELOC and how much mortgage debt you have.
Here’s what you need to know about HELOC tax deductions, including the requirements and limitations on HELOC tax-deductible expenses, plus how to calculate your deduction.
What Is a HELOC?
Whether to cover renovation costs or consolidate debt, homeowners can borrow against the value of their home to secure the necessary funding. There are two main types of home equity loans: a conventional home equity loan and a home equity line of credit, also known as a HELOC. A HELOC functions as a revolving line of credit that uses home equity — the home’s value minus the amount you still owe on the primary mortgage — as collateral.
How much you can borrow typically ranges from 75% to 90% of your home equity. Generally, lenders require a minimum of 15% to 20% equity in your home to be eligible for a HELOC.
When comparing a HELOC vs a home equity loan, a key difference is that a HELOC allows you to draw funds as you need them, up to a maximum limit, over a draw period (often 10 years). By contrast, home equity loans disburse funds all at once.
With HELOC loans, you pay interest only on the amount you withdraw. Once the draw period ends, any remaining borrowed funds and interest are repaid over a repayment period, which can vary but typically spans 10 years.
Dive deeper: What Is a Home Equity Line of Credit?
How Does a HELOC Affect Your Taxes?
The interest paid on a HELOC could qualify as a tax deduction to lower your taxable income. If you own a home and are planning to claim a HELOC tax deduction, there are some requirements and limitations to keep in mind.
Turn your home equity into cash with a HELOC brokered by SoFi.
Access up to 90% or $500k of your home’s equity to finance almost anything.
Requirements for the HELOC Interest Tax Deduction
To answer “is interest on a HELOC tax deductible,” it’s essential to check that you meet certain requirements set by the Internal Revenue Service (IRS).
Since the Tax Cuts and Jobs Act of 2017, there are stricter requirements for how funds are spent to be eligible for a HELOC tax deduction. Specifically, funds from a HELOC must be used to buy, build, or improve a qualifying home — either a primary or second home. Eligible expenses can range from rewiring a house to replacing a roof or remodeling a kitchen. Note that funds must be spent on the same property used to secure the HELOC.
It’s also required that you have positive equity in the home used to secure the HELOC. If you have an underwater mortgage, meaning you owe more on the home than its value, you are not eligible for a HELOC tax deduction.
These requirements are in place for tax years 2018 through 2025. Prior to the rule change, a HELOC tax deduction could be made for interest paid on debt used for any type of personal expenses, not just home improvements.
Recommended: Cash Refinance vs. Home Equity
HELOC Tax Deduction Purchase Limits
HELOC tax deductions are not unlimited. So, up to what amount are HELOC loans tax deductible?
The IRS allows you to deduct interest on a maximum of $750,000 in residential loan debt (or $375,000 if married filing separately), including the primary mortgage and a HELOC. For instance, if you had $700,000 left on a home mortgage loan and $150,000 in HELOC debt, you could only deduct interest on the first $750,000 of debt.
If your primary mortgage or HELOC was approved before the 2018 tax year, you may be eligible to claim interest up to the previous limit of $1 million (or $500,000 if married filing separately). Borrowers who took out a HELOC in 2017 or earlier should note that the rule change did away with the $100,000 limit (or $50,000 if married filing separately) on home equity debt for tax deductions.
Tax Deduction Limits on Primary Mortgages
The tax deduction limits on primary mortgages are based on when the mortgage loan was taken out.
If you took out a mortgage before October 13th, 1987, there is no cap on mortgage interest tax deductions. Homebuyers who got a mortgage between October 13, 1987 and December 16, 2017, can deduct interest on up to $1 million in total mortgage debt for married couples filing jointly and single filers. The limit is $500,000 for married couples filing separately.
If you took your mortgage out after December 16, 2017, you can deduct up to $750,000 (or $375,000 if married filing separately).
These limits applied to all combined mortgage debt, including first homes, second homes, and HELOC loans.
Is Home Equity Loan Interest Tax Deductible?
The tax deduction rules for home equity loan interest is the same as a home equity line of credit. As long as you’re using funds to buy, build, or improve a home, you can claim a tax deduction on mortgage debt up to $750,000.
Recommended: What Is a Home Equity Loan?
How to Calculate a HELOC Interest Tax Deduction
Prior to filing taxes, you should receive IRS Form 1098 from your HELOC and mortgage lenders. This form indicates the interest you paid on your HELOC, primary mortgage, or home equity loan in the previous year.
If you used any HELOC funding for ineligible uses, such as personal expenses or debt consolidation, you’ll need to subtract that portion to get the deductible interest.
Besides the interest you paid on your primary mortgage and HELOC loan, total up other deductions like property taxes, mortgage points, and student loan interest. Since you can only deduct mortgage and HELOC interest payments with an itemized deduction, it’s important to check that the total of your deductions exceeds the standard deduction amount.
Here are the standard deduction amounts for tax year 2024:
• Single or Married Filing Separately: $14,600.
• Married Filing Jointly or Qualifying Surviving Spouse: $29,200.
• Head of Household: $21,900.
If the mortgage and HELOC interest, plus other tax deductions you’re eligible for, exceed the above amounts, then it’s worth considering itemizing.
Recommended: Personal Line of Credit vs. HELOC
How to Deduct Home Equity Loan Interest
To deduct home equity loan interest, you’ll need to gather any receipts or invoices documenting how the money was spent. Be sure to keep records of transactions for eligible home renovations and improvements to verify your deductions in case you are audited by the IRS.
Once you’ve compiled all the necessary documentation, you’ll itemize your deductions using Schedule A of IRS Form 1040.
Does a HELOC Affect Property Taxes?
While the amount you take out through a HELOC won’t affect your property taxes, the improvements you make to your home could potentially increase the value of your home. If your renovation is substantial and involves a permit, it could be more likely to change the appraised value and potentially increase your property taxes.
The Takeaway
You can deduct the interest paid on your HELOC if the funds are used to buy, build, or improve your home. HELOC tax deductions must be itemized, and they are only allowable for the first $750,000 in mortgage debt on qualifying primary and secondary residences.
SoFi now offers flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively low rates. And the application process is quick and convenient.
FAQ
Do you report a HELOC on your taxes?
You report your HELOC interest on your taxes if you’re claiming an itemized deduction and you used your HELOC to build or improve your home.
Will a HELOC appraisal raise my taxes?
No, a HELOC appraisal will not raise your taxes. Property taxes are based on the appraised value of your home by your local government.
Does HELOC affect capital gains tax?
No, a HELOC does not affect capital gains tax on a home sale.
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All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.
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What Is Flight to Quality?
Flight to quality, also known as flight to safety, is when investors shift their assets away from riskier investments — like stocks — into conservative securities – like bonds. This reaction often occurs during turbulent times in the economy or financial markets, and investors want to put their money into relatively safe assets.
Because flight to quality is a term that’s often thrown around in the financial media, investors need to know what it is and how it can potentially impact an investment portfolio. A flight to quality is a short-term trading strategy that might not be ideal for long-term investors. But it’s still important for investors to know how the broader trend may affect the financial markets.
What Causes Flight to Quality?
Economic uncertainty is why investors look to reorient their portfolios away from volatile investments to conservative ones. Moments of economic uncertainty that spook investors can arise for various reasons, including geopolitical conflict, a sudden collapse of a financial institution, or signs of an imminent recession.
A flight to quality usually refers to a widespread phenomenon where investors shift their portfolio asset allocation. This large-scale change in risk sentiment can generally be seen in declines in stock market indices and government bond yields, as investors sell risky stocks to put money into more stable bonds.
Though a flight to quality usually refers to a herd-like behavior of most investors during economic uncertainty, individual investors can make a similar move at any time, depending on their risk tolerance and specific financial situation.
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What Are the Effects of Flight to Quality?
During periods of flight to quality, investors tend to trade higher-risk investments for lower-risk ones. This shift commonly results in a decrease in the price of high-risk assets and boosts the price of lower-risk securities.
As mentioned above, investors can see one effect of a flight to quality in the price of major stock market indices and bond yields, as the market shifts money from the risky stocks to safer bonds.
But a flight to quality doesn’t mean that investors will necessarily shift out of one asset (stocks) into another (bonds). For example, investors worried about the economy might sell growth stocks in favor of more reliable value or blue-chip stocks, pushing the price of the growth stocks down and boosting the price of the blue chips.
💡 Recommended: Value vs. Growth Stocks
A flight to quality may also shift investment from emerging market stocks to domestic stocks or from corporate bonds to government bonds.
In addition to moving funds from stocks to bonds or other assets, investors may also move money into cash and cash-equivalent investments, like money market funds, certificates of deposit, and Treasury bills, during periods of economic uncertainty.
Real-World Example of Flight to Quality
A flight to quality occurred during the early stages of the COVID-19 pandemic and related economic shutdowns in 2020. Investors scrambled to figure out their portfolio positions in the face of an unprecedented global event, selling stocks and putting money into relatively safe assets.
The S&P 500 Index fell nearly 34% from a high on Feb. 19, 2020, to a low on Mar. 23, 2020, as investors sold off equities. But investors didn’t rush to put this money into high-grade corporate and government bonds, as many would have thought in a regular flight to quality. A record $109 billion flowed out of fixed-income mutual funds and exchange-traded funds (ETFs) during a single week in March 2020. Instead, investors moved capital into cash and cash-like assets during this volatile period in a desire for liquidity.
💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.
The Takeaway
A widespread flight to quality that creates volatility in the financial markets can be scary for many investors. When you see decreases in a portfolio or 401(k), it can be tempting to follow the broader market trends and shift your asset allocation to safer investments. However, this is not always the best choice, especially for investors trying to build long-term wealth.
Flights to quality have happened in the past (such as during the early stages of the pandemic in 2020), and will, in all likelihood, happen again. But even if you don’t get caught up in it, it’s good to know what’s happening in the markets, and why.
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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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