President Donald Trump’s new tax reform bill brought many changes to the tax code, including cutting away the deduction for the interest paid on home equity loans (known as HELOCs).
However, this reform’s timing seems a bit awkward since the “tappable” equity (the Fed defined as available equity in U.S homes) available to U.S. homeowners reached an all-time high in 2017.
As nearly 80 percent of U.S. homeowners sit on substantial amounts of equity, many analysts are now questioning the purpose of eliminating HELOC interest a mortgage deduction on primary residences.
What are home equity loans?
Home equity is the difference between a home’s market value minus the amount of money needed to pay-off the existing mortgage. This equity can be used to borrow cash through home equity loans – which are generally revolving lines of credit.
The maximum quantity of money that a borrower can access is typically equal to 80 percent of the value of their home.
The growing market of home equity borrowers:
The amount of tappable equity is now as high as it has ever been. Over 42 million homeowners with mortgages across the country are now sitting on nearly $5.5 trillion in untapped equity!
To make a direct comparison, in 2012, shortly after the financial crisis, this value amounted to just $2.5 trillion.
Today, less than 2.5% of homeowners are “underwater.”
What is changed under the new Trump Tax Law:
Before the tax change, borrowers could deduct interest paid on up to HELOCs with balances up to $100,000 from their taxes. However, under the new tax reform bill, the interest paid on home equity lines of credit are no longer deductible. The change takes effect in 2018, so this is the last year that homeowners can deduct the interest they pay.
Primary loans are left untouched, meaning that mortgage borrowers can still write off the interest paid on their mortgage debt up to $750,000 (although this is down from $1 million).
What does this mean for homeowners?
If you are seeking to “cash-out” on some of your equity – please be aware of the current tax changes! Many Florida homeowners are considering selling to “cash out” of their home or considering a full refinance if they have existing HELOCs.
If you have any questions related to the Trump tax laws, HELOCS, refinancing, or selling your home, please call the lawyers of Boss Law for a FREE CONSULTATION.