Summary: Homeowners in Washington State cannot claim tax deductions on home equity loans. But they can still take advantage of convenient cash-out refinancing programs to use the equity they’ve built up in their homes. This article will outline what you options are.
Homeowners in Washington State can no longer write off the interest paid on home equity loans. This was one of many changes introduced by the Tax Cuts and Jobs Act, which was signed by President Trump in December 2017. Since the interest paid on home equity loans is not tax-deductible, we could see a continued increase in cash-out refinancing among homeowners in Washington.
Note: There is an update to this story. An IRS advisory clarified the new rules. Deductions are still allowed if homeowners use the funds from the loan to “buy, build or substantially improve” the property that’s being used as collateral.
No More Tax Deductions for Home Equity Loans
The new tax reform plan has made many changes that could affect residents and 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 can no longer deduct the interest paid on those loans.
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, those deductions are a thing of the past.
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, despite the elimination of this particular tax deduction.
Cash-Out Refinancing for Washington Homeowners
We could also see a continued increase in the number of cash-out refinance loans across Washington State, as homeowners look for an alternative method for converting their built-up equity into cash.
Home values have been steadily rising across Washington State, giving homeowners more equity in their homes. In order to take advantage of this – as well as the historically-low interest rates over the recent past – many of them are opting for a cash-out refinance to convert some of their equity into cash. This trend has been ongoing throughout 2017 through last year, and it’s expected that this trend will continue into 2020.
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.
The difference with a cash-out refinance (compared to a standard home equity loan) is that the loan balance should still be tax-deductible, if it’s a first mortgage on a primary residence. Homeowners in Washington State can still deduct the interest paid on their primary mortgage loans. The maximum deduction was reduced from $1 million to $750,000, but it is still allowed.
Is 2020 a Good Time to Refinance?
With low mortgage rates and rising home values, an increasing number of homeowners across Washington could be in a good position to refinance their existing mortgage loans. And some of them will likely use cash-out refinancing to convert some of that equity into cash.
According to the real estate information company Zillow, the median home value for the state of Washington rose by around 3.6% during the 12-month period ending in January 2020. Freddie Mac reports that the average rate for a 30-year fixed mortgage loan is still hovering below 4%, as of January 13, 2020. These trends could make refinancing a viable strategy for more and more homeowners.
Looking to Apply for a Loan Program?
Do you have questions about Washington State home loans? Want to get pre-approved for a mortgage, or request a rate quote? We can help. Sammamish Mortgage is a local, family-owned company based in Bellevue, Washington that has been providing borrowers with mortgage programs for over 25 years. We serve the entire state, as well as the broader Pacific Northwest region. Please contact us if you have mortgage-related questions.