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No More Tax Deductions for Home Equity Loans in Washington

Starting in 2018, homeowners in Washington State can no longer write off the interest paid on home equity loans. This is 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 no longer tax-deductible, we could see an 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

Republicans in the House and Senate finally settled on a tax reform plan, and it was subsequently signed by the president a couple of weeks ago. The new tax bill makes 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 is a major change that 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 passage of the Tax Cuts and Jobs Act, those deductions are a thing of the past.

These changes will also affect existing equity loans, because they are not being grandfathered. They will affect borrowers who take out home equity loans in 2018, as well as those who have taken them out 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.

View Washington State Mortgage Rates Nov, 18, Mon, 2019

Cash-Out Refinancing for Washington Homeowners

We could also see an 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.

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. In 2018 and beyond, 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 2018 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.

Related: Refinance activity picks up

According to the real estate information company Zillow, the median home value for the state of Washington rose by around 10% during the 12-month period ending in November 2017. Freddie Mac reports that the average rate for a 30-year fixed mortgage loan is still hovering below 4%, as of January 5, 2018. These trends could make refinancing a viable strategy for more and more homeowners.

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Have questions? Sammamish Mortgage is a local, family-owned company based in Bellevue, Washington. We serve the entire state, as well as the broader Pacific Northwest region. Please contact us if you have mortgage-related questions.

Last Updated: Jun 21, 2019 @ 5:05 pm

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