Home Equity Loans No Longer Deductible, Starting in 2018

New Jersey homeowners with home equity loans will no longer be able to deduct from their taxes the interest paid on those loans, according to new legislation. This is the result of the sweeping tax law signed by President Trump in December.

Here’s what you need to know about these tax-code changes 2018, as they apply to home equity loans in New Jersey.

Home Equity Loan Tax Deductions Eliminated

In the past, most homeowners with home equity loans were able to deduct the interest paid on those loans, up to $100,000 in most cases (or $50,000 for married couples filing separately). With the passage of the Tax Cuts and Jobs Act, however, that deduction is going away.

These changes apply to home equity loans taken out in 2018 and onward, as well as those that were taken out in the past. In other words, the old deduction will not be grandfathered.

Despite these changes, home equity loans can be still a useful financing tool for some homeowners. It’s one of the cheaper ways to borrow money. That’s because the average rates assigned to these loans are typically much lower than credit card rates and other forms of financing. The new law just means that the interest paid on a home equity loan in New Jersey is no longer deductible, staring in 2018.

Still, that’s enough to get the attention of many homeowners. New Jersey is an expensive state in which to live, so homeowners have long cherished these and other deductions as a way to lower their overall tax bill and living expenses.

The question is, what now? Is there anything homeowners in this situation can do to regain some of their tax deductions? Consolidating might be an option here.

Refinancing to Consolidate First and Second Mortgage

One strategy that might work is consolidation refinancing. This is where the borrower / homeowner refinances in order to combine or “consolidate” a first and second mortgage, including an equity-based loan. And by adding a “cash-out” component, homeowners could still convert some of their equity into cash. The end result would be that the entire loan balance is once more tax-deductible, up to a certain limit.

Definition: Cash-out mortgage refinancing is when a borrower refinances an existing mortgage loan, or even two loans, for a larger amount and then receives the difference in cash. This strategy allows homeowners to turn some of the equity they’ve built up in their homes into cash. The money received could be used for a variety of purposes, including home improvements and educational expenses.

The mortgage interest deduction for a first mortgage on a primary residence still exists. Mortgage interest deductions were reduced from a cap of $1 million (before the new law), to a lower limit of $750,000. But they are still allowable under the new tax legislation. So, in some cases, New Jersey homeowners might be able to refinance a first and second mortgage into one, thereby regaining their tax deduction benefits.

Thirty-year mortgage rates are still hovering near 4%, according to the weekly survey conducted by Freddie Mac (as of January 5, 2018). And home prices have risen over the last few years, boosting equity levels. So a lot of homeowners across New Jersey might be in a good position to refinance, possibly by consolidating a first and second mortgage with cash-out benefits.

Tax code revisions can be downright confusing, especially when there are multiple versions of a bill leading up to its final passage. That’s why it is so important to speak to a knowledgeable mortgage professional about your financing options. Please contact our team if you have questions about refinancing your existing loan(s).