Short Story: The Truth About Home Equity Loans 2018

The new tax reform law has changed the way of calculating the home equity debt. It’s going to hit many homeowners with these loans and their chance of retrieving deductions for the interest paid in 2017. The concerning matter is that only a tiny portion of the home equity loan borrowers are aware that the new tax code will hurt them. Others are still living in the illusion of reaping the benefits.

What Is a Home Equity Loan?

Also known as a second mortgage, the loan allows homeowners borrowing money based on the equity in their homes. Its popularity skyrocketed in the late 1980s because it allowed the borrowers to sneak the Tax Reform Act in 1986. They could borrow up to $100,000 and be eligible for deductions on most consumer purchases.

How Has the Current Law Affected the Deductions?

The GOP tax reform package became law in December 2017. It stripped the benefit of home equity loan tax deduction from 2018 to 2015. There is only one way to recoup the deductions, which is you have to spend it on home renovations.

However, there’s still a catch! Even if you use the money for renovations, there are limits to claim your deductions. They can take interest deductions on maximum $750,000 (Which is $375,000 for a married person filing separately) in debt related to their house. So, you are fine if your first mortgage and the line of credit for home equity jointly don’t cross that limit.

If the limit exceeds, you won’t get any deduction, even if the expenses are related to the home renovation. The only consolation is you can be worry-free for this tax season because it will be in effect next year.

Other Benefits of Home Equity Loans

The home equity loans are still a good deal because they are an easy source of money that you can use for clearing some debts or save it for a rainy day. The interest rate is higher than that of your home mortgage but the rate is still lower compared to credit cards and plenty of other loans available for the consumers.

It is also beneficial for the lenders as they earn more on interest and fees after scoring the interest and fees on the first mortgage (given that the borrower chooses the same lender). They can keep all the earnings if the borrower defaults along with getting the ownership of the property. They can start the same earning cycle with the next borrower by selling the house.

How Can the Borrowers Take Preparation for the New Tax Law?

The IRS is yet to declare anything regarding how they are going to audit the borrowers. The best practice will be to keep the statements along with the receipts. You also have to make sure that your hired contractors can provide payment proofs if required. If you are due for an audit, all these records will help you to get the deductions you deserve.