The new Tax Reform Law went into effect on January 1st. The new law makes a number of significant changes to the tax code, including getting rid of the deduction for the interest paid on home equity loans. Here is what you need to know about that change.
First, let’s review what home equity loans are:
These are loans that can be taken out by homeowners using their home equity. Home equity is the difference between a home’s market value and the remaining balance on the mortgage. Homeowners have two options: they can take out a home equity loan (HEL), which is a one time loan with a fixed interest rate, or they can take out a home equity line of credit (HELOC), which acts like a credit card with a specific debt limit based on home equity. The interest rate on a home equity line of credit typically varies with the market.
Here’s how the new tax law is going to affect home equity loans:
Before 2018, homeowners who took out home equity loans were able to deduct the loan’s interest up to $100,000 from their taxes. This deduction is now a thing of the past.
So, what should you do with that HEL or HELOC?
- You really should consider paying it off, especially if you have money, in excess of your emergency reserve funds, that is not earning a rate of return exceeding the loan’s interest rate.
- If you still want access to your home equity, you can do a cash out mortgage refinance. This basically is a mortgage refi but the new loan is for a larger amount. You’ll receive the difference between the two loans in cash and you can still deduct the interest.
In summary, there are a lot of moving parts when it comes to the tax code so talk to your tax adviser to see if it makes sense to pay down your HEL/HELOC.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
