Using Your Equity

How the New Tax Bill Affects Home Equity Loan Borrowers

Woman on her laptop considering how the new tax bill affect her home equity loan

These changes also apply to cash out refinances. A cash out refinance is when you refinance your primary mortgage to borrow money above and beyond your outstanding mortgage balance. As with a home equity loan, you need to determine whether the cash out portion will be considered "acquisition indebtedness.” In other words, whether the cash out portion will be used to improve your home.

However, this is relevant only if you will continue to itemize your deduction under the new law. As per the recent changes, the standard deduction has increased substantially from $12,700 for a married couple filing jointly to $24,000 (for single filers, this number changed from $6,350 to $12,000).

Man sitting on his couch with papers that show what the impact of the new tax bill will be on his home equity loan

It makes sense to itemize only if your interest on home equity loans plus other deductible items exceeds $14,000

These changes also apply to cash out refinances. A cash out refinance is when you refinance your primary mortgage to borrow money above and beyond your outstanding mortgage balance. As with a home equity loan, you need to determine whether the cash out portion will be considered "acquisition indebtedness.” In other words, whether the cash out portion will be used to improve your home.

However, this is relevant only if you will continue to itemize your deduction under the new law. As per the recent changes, the standard deduction has increased substantially from $12,700 for a married couple filing jointly to $24,000 (for single filers, this number changed from $6,350 to $12,000).

At the same time, the deduction for state and local taxes paid in any tax year has now been capped at $10,000, including real estate, personal property, and income taxes. This means that it makes sense to itemize only if your interest on home equity loans plus other deductible items exceeds $14,000. According to research from the Tax Policy Center, 30% of individual tax filers itemized their deductions in 2015. Under the new tax law, that share is expected to be cut in half. So if you are like the majority of tax filers, then you would not itemize going forward and the question of tax deductibility is irrelevant to your decision about whether to take out a home equity loan.

So for most borrowers, the changes for home equity loan interest under the new tax bill are likely to be less critical. Interest rates, monthly payment amounts and fees may be more important factors when considering your financing options. Nevertheless, tax law is complicated and every household's situation is different. If the tax deductibility of your home equity loan interest is important to you, consult your personal tax advisor about how the new tax bill will impact you.

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The home equity you’ve earned
can be used in a multitude of
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