Tax saving begins with your home and its equity

Tax saving begins with your home and its equity By Gary Dybsetter April 15 is nearing � an annual reminder for many taxpayers that they need to put their financial houses in order this year so they can reduce next year's tax bill.

One of the best tax-cutting strategies for many consumers is right at your doorstep � your home and the equity you have in it. Using your home's equity is a smart way to manage your finances, and it can provide potential tax savings come next April 15.

Like the interest on home mortgages, interest on home equity loans and lines of credit may be tax-deductible. To find out, consult your tax advisor.

According to the U.S. Department of Commerce's Census Bureau, 74.4 million householders owned their homes in the fourth quarter of 2004. Property values continue to grow throughout the country despite changing interest rates and, as a result, millions of Americans have built up substantial equity in their homes.

Value of real estate in the country reached $16.6 trillion in the third quarter of 2004, according to the Federal Reserve. Of that, $9.3 trillion of equity remained untapped. Only one in three of U.S. Homeowners have a home equity loan or line of credit. That means millions of homeowners may be missing out on potential tax advantages.

Another reason to make the most of your home's equity: Interest rates on home equity loans and lines of credit typically are lower than rates charged for other types of financing. That's especially true today, when mortgage and home equity rates are at historic lows.

As these loans and lines of credit become more popular, financial services companies are streamlining the process of obtaining the lending. They also are developing flexible programs that allow homeowners to make smart and sound financial decisions based on their individual situations.

For example, Wells Fargo's Home Asset ManagementSM Account allows a customer to obtain a first mortgage and a home equity line of credit at the same time. With this account, as the principal balance of the mortgage loan is paid down and as the home's value is estimated to go up, the amount of available equity on the line of credit may be increased without having to reapply. In addition, you receive informative and valuable reports that track your account and home value activity.

Here's how it works: You buy a $150,000 home with $30,000 down. Your home equity line of credit � opened at the same time you obtain the first mortgage � is $30,000. After a year, if the value of the home is estimated to go up to $160,000, the home equity line of credit could rise to $40,000. The line of credit could also increase by the amount of mortgage principal you've paid down over the year, so if you've reduced the principal by $2,000 in that same year, the line of credit could be $42,000.

In addition to mortgage and home equity loan interest, your home may provide other tax-saving opportunities. Talk with your tax advisor to make sure you're taking full advantage of these potential deductions such as prepaid interest and points that are generally deductible in the year paid if the points are pad to acquire a property. If the points are paid for a mortgage refinance, the points must be deducted over the life of the loan.

For more general information about what's deductible in terms of home loan interest, read the IRS Publication 530, Tax Information for first-Time Homeowners, and Publication 936, Home Mortgage Interest Deduction.

Your tax advisor should be able to help you put your home's equity to work for you and keep more of your income in your pocket. Home equity financing is a credible option for making important purchases and paying for major expenses at tax time and any time. It's smart to make the most of your home asset.

Gary Dybsetter is Community Banking president for Wells Fargo in Yankton.

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