Washington homeowners may be able to deduct home equity loan or HELOC interest, but only in certain situations. The main question is a federal mortgage-interest deduction issue that applies to Washington homeowners: under current IRS guidance, interest is generally deductible only when the borrowed funds are used to buy, build, or substantially improve the home securing the loan.
That means home equity loan interest is not automatically deductible just because you borrowed against your home. If you are considering using equity in your property, it’s important to confirm how the funds will be used, review current IRS guidance, and check the details with a qualified tax professional. Some borrowers also compare a home equity loan or HELOC with cash-out refinancing programs when deciding how to access equity.
The tax rules affecting mortgage interest can have an impact on homeowners across Washington State.
In a previous blog post, we explained the lower limit for mortgage interest tax deductions. Additionally, homeowners who use home equity loans to convert equity into cash should know that interest deductibility depends on how the funds are used. Interest on home equity loans and lines of credit may still be deductible when the borrowed funds are used to buy, build, or substantially improve the home securing the loan.
This could affect many people. In the past, homeowners in Washington and elsewhere across the country were able to deduct the interest paid on home equity loans — up to $100,000 in most cases. But with the Tax Cuts and Jobs Act in effect, deductibility now depends on whether the loan proceeds were used to buy, build, or substantially improve the home.
These changes also affect existing equity loans, because they are not being grandfathered. They will affect borrowers who have taken out home equity loans in the past.
Despite all of this, home equity loans can still be a smart financing strategy for certain borrowers. It’s one of the cheapest forms of borrowing, especially when you compare it to the much higher interest rates associated with credit cards. So homeowners will probably continue to pursue home equity loans in Washington.
Some Washington homeowners compare a cash-out refinance with a home equity loan or HELOC when they want to access equity. The main difference is structural: a cash-out refinance replaces your current mortgage with a new, larger loan, while a home equity loan or HELOC typically adds a separate loan on top of your existing mortgage.
A cash-out refinance is when a borrower takes out a new loan for a higher amount than what they owe on their current one. The borrower then receives the difference in cash. So it’s essentially a way to borrow from the equity you have built up in your home.
From a tax standpoint, borrowers should avoid assuming that cash-out refinance interest is automatically deductible in every case. In most cases, you can deduct home mortgage interest, but how much you can deduct depends on factors such as the amount of indebtedness and whether the loan meets current IRS requirements. Current IRS guidance also ties deductibility to how proceeds are used, so borrowers should compare options based on both loan structure and purpose.
For example, a homeowner might compare these options differently depending on whether the goal is to improve the home, consolidate other finances, or change the terms of an existing first mortgage. If you are weighing a cash-out refinance against a home equity loan or HELOC, it can help to review both the financing terms and the potential tax treatment before choosing between them.
Refinancing can still be worthwhile for some Washington homeowners, depending on their current loan terms, equity position, and financial goals. Some borrowers may also consider cash-out refinancing as a way to convert part of their equity into cash.
Related: Cash-Out Refinancing in Washington State: A Rising Trend?
According to Zillow, the Washington home value index was $603,303 as of June 30, 2026, down 0.6% year over year. Freddie Mac reports that the average rate for a 30-year fixed mortgage loan was 6.71% as of September 3, 2026. These market conditions may lead homeowners to weigh the potential benefits of refinancing against today’s borrowing costs.
If you’re planning to use home equity, a practical next step is to verify potential deductibility with a tax professional based on how you intend to use the funds. After that, you can compare a home equity loan, HELOC, and cash-out refinance to see which option best fits your goals, current mortgage structure, and borrowing needs.
If you want help evaluating mortgage-related options, Sammamish Mortgage can help Washington borrowers compare available mortgage programs and next steps. Please contact us if you have mortgage-related questions.
Washington homeowners may be able to deduct home equity loan or HELOC interest, but not automatically. Under current IRS guidance, interest is generally deductible only when the borrowed funds are used to buy, build, or substantially improve the home securing the loan.
It may be deductible in 2026, but only in certain situations. Current IRS guidance generally ties deductibility to whether the loan proceeds were used to buy, build, or substantially improve the home that secures the loan.
There is no automatic deduction based simply on the loan amount. How much interest may be deductible depends on factors such as how the funds were used, the amount of indebtedness, and whether the loan meets current IRS requirements.
Not usually based on the guidance described here. Interest is generally deductible only when the borrowed funds are used to buy, build, or substantially improve the home securing the loan, so using proceeds for debt consolidation may not qualify.
It may be deductible if the remodeling work substantially improves the home securing the HELOC. Because deductibility depends on how the funds are used and how the project fits current IRS guidance, it is wise to confirm the details with a qualified tax professional.
Current IRS guidance uses the standard of buying, building, or substantially improving the home securing the loan. Because the specific treatment of a project can depend on the facts, borrowers should review planned uses of funds and confirm eligibility with a qualified tax professional.
Deductibility depends on how the funds were used, so mixed uses can make the analysis more complicated. If only part of the proceeds went toward buying, building, or substantially improving the home securing the loan, it is important to review the details with a qualified tax professional.
Borrowers should not assume cash-out refinance interest is automatically deductible in every case. Current IRS guidance also ties deductibility to how proceeds are used, and the amount you can deduct can depend on factors such as the amount of indebtedness and whether the loan meets current IRS requirements.
A cash-out refinance replaces your current mortgage with a new, larger loan and returns the difference in cash. A home equity loan or HELOC usually adds a separate loan on top of your existing mortgage instead of replacing it.
The tax issue discussed here is the federal mortgage-interest deduction as it applies to Washington homeowners. Because tax treatment can depend on current rules and individual circumstances, borrowers should verify any state or federal questions with a qualified tax professional.
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