New Tax Laws and Home Equity Interest Deductions
As a result of the new tax legislation, enacted in December of 2017, homeowners will not receive tax deductions on home equity loan interest. Since the 1980’s homeowners have enjoyed a deduction for home equity interest on amounts up to $100,000. The legislation eliminated tax deductions for interest on new and existing home equity loans from 2018 through 2025. It did not eliminate deductions for interest on primary home mortgage loans.
Is this bad news for you?
Though the new tax legislation sounds like bad news for home equity borrowers, there is hope for some homeowners, depending on the purpose of the loan. For example, the deduction is still available if you use the loan to pay home improvement costs. However, you won’t be able to deduct the interest on loan amounts used to cover debt consolidation or student loans. The IRS has not ironed out all of the wrinkles on this tax law, so talk with your tax professional to determine whether your home equity loan interest will be tax deductible.
Low-interest revolving credit makes up for loss of deductions.
Regardless of whether home equity loans earn a deduction or not, they remain one of the least expensive options for borrowers. Home equity loans carry a low interest rate because they are secured by your home. This makes them safe for your lender and also enables your lender to make more on your home through fees and interest. Home equity loans are also variable-rate loans that behave like a credit card, allowing you to borrow what you need, when you need it.
Home equity loans are still loans—use them wisely.
Though home equity loans are a great resource, it is still a loan and you will still pay interest on it, which means you should think carefully about your reasons for getting it. Make sure that the purchase(s) you are making with the loan are necessary. For example, if your home is in dire need of weatherization, which will save you money in the long-term, a home equity loan may be your best bet. If you are in debt, paying on multiple high-interest loans and credit cards, a home equity loan could play a key role in getting you back on track. But if you want to take a vacation or buy a luxury item, you might want to spend some time saving up for it so that you’re not paying it off for months or years to come.
Looking for new ways to save money? How about saving money with your credit card?