Using Your Equity

How Tax Rules Affects Home Equity Loan Borrowers

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

These rules 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, under the tax rules to determine if you are entitled to a deduction, 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 itemize your deductions under the tax rules. As per the changes, the standard deduction has increased substantially from $12,700 for a married couple filing jointly to $25,100 (for single filers, this number changed from $6,350 to $12,550).

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 $10,000

These rules 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 itemize your deductions under the tax rules. As per the recent changes, the standard deduction has increased substantially from $12,700 for a married couple filing jointly to $25,100 (for single filers, this number changed from $6,350 to $12,550).

At the same time, the deduction for state and local taxes paid in any tax year is 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 $10,000. According to research, 11% of individual tax filers itemized their deductions in 2019. 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  tax rules are likely to be less critical. Interest rates, monthly payment amounts and fees may be more important factors when considering your financing options. 

NOTE: Tax law is complicated and every household's situation is different. If the tax deductibility of your home equity loan or cash-out refinance loan interest is important to you, consult your personal tax advisor about how the tax rules impact you.

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


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