How Does The New Tax Law Affect Home Equity Loans?

On December 22, 2017 the President signed the Tax Cuts and Jobs Act of 2017.  The new law makes many significant changes to the tax code, including doing away with the deduction for the interest paid on home equity loans.

Home equity loans allow homeowners to borrow against the equity that they have in their home. Home equity is the difference between a home’s market value and the remaining balance on the mortgage. Homeowners, generally, have two options: they can borrow a fixed dollar amount in the form of a home equity loan, or they can establish a home equity line of credit, which acts like a credit card with a specific debt limit based on home equity. Generally, the interest rate on a home equity line of credit adjusts with movements in market rates.

The new tax law will affect the tax treatment of interest paid on home equity loans or lines.  In the past, homeowners who took out home equity loans or lines were able to deduct the loan’s interest up to $100,000 with certain restrictions on the total amount of outstanding debt. Under the new tax law, this deduction will become a thing of past. The change takes effect in 2018, meaning this is the last year that homeowners can write off the interest paid.  Furthermore, there is no grand-fathering of interest on loans obtained prior to the signing of the new tax law.

According to a recent study by the New York Federal Reserve, the aggregate balance on home equity loans and lines of credit totaled approx. $500 billion at the end of 2016.

In the past, people would take out home equity loans and lines to finance home renovations, consolidate other debts, purchase an automobile, or pay for college tuition.  In many circumstances, borrowers chose to utilize a home equity loan or line specifically due to the deductibility of associated interest costs.

Fortunately, the new tax law still provides for a mortgage interest deduction on first mortgage loans.  The threshold limit on first mortgage balances is now $750,000. In other words, if you have first mortgage debt of $750,000 or less you may be able to completely deduct the interest costs.  Please consult your tax advisor.  Therefore, a strategy for consumers who presently have home equity loans or lines of credit and wish to maintain the tax deductibility of the associated interest expense is to refinance that debt into a first mortgage.

State Bank of Cross Plains Mortgage Lenders are ready to talk with you about your options and what product presents you with the best tax-advantaged financial strategy.

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