Summary: Getting the lowest interest rate possible on your mortgage is key to making it more affordable and paying much less in interest over the life of your loan. Luckily, there are some strategies that you can employ in Washington to snag a lower rate: cash-out refinances and equity loans. This article will go into more detail about these strategies.
Traditionally, the home equity loan has been one of the primary strategies for Washington homeowners wanting to convert some of their equity into cash. But with the recent changes to the tax code, more and more homeowners in Washington State might start looking at the cash-out refinance loan as an alternative.
Some Home-Equity Loans No Longer Deductible
Back in December, President Trump signed into law the Tax Cuts and Jobs Act (TCJA), which brought several changes to the U.S. tax code. Among other things, it strips some homeowners of their ability to deduct interest paid on home equity loans.
In the past, homeowners in Washington and nationwide were allowed to write off some of the interest paid on their home equity loans, in the form of a tax deduction. But with the passage of the new tax bill, that deduction went away for most homeowners.
According to some sources, however, an equity-based loan that is used to substantially improve a home might still be deductible — or at least partially so.
Kevin McCormally, a reporter who specializes in taxes, recently wrote the following for Kiplinger.com:
“As in the past, home-equity loan proceeds used to substantially improve a home are considered acquisition indebtedness, so the debt falls under the rules that permit interest on up to $750,000 of such debt to be deducted.”
Writing for MarketWatch, real estate columnist Kenneth Harney interprets it the same way:
“A close reading of the final language … reveals that interest-deductible HELOCs and second mortgages should still be available to homeowners provided they qualify on two criteria: they use the proceeds of the loan to make ‘substantial improvements’ to their home, and the combined total of their first mortgage balance and their HELOC or second mortgage does not exceed the new $750,000 limit…”
But for most other scenarios, tax deductions for the interest paid on home equity loans in Washington have become a thing of the past. For now, anyway.
Cash-Out Refinance: An Alternate Strategy?
Which brings us to the cash-out refinance loan. Given the recent changes to the tax code, more and more homeowners in Washington State might begin to consider cash-out refinancing as a way to turn equity into cash. Here’s what you should know about it.
Definition: A cash-out refinance loan occurs when homeowners refinance their existing mortgage loans for a larger amount than what they currently owe, receiving the difference in cash. As with a home equity loan, a cash-out refinance gives the homeowner a way to convert some of the built-up equity into cash. The money received can be used for many purposes, including college tuition and home improvement.
The tax deduction for interest paid on a primary mortgage loan still exists, up to a general limit of $750,000. So a homeowner in Washington who uses a cash-out refinance should, in theory, still be able to deduct the interest on the new loan up to the current limit of $750,000. (With a cash-out refinance, you are essentially replacing your current mortgage loan with a new one.)
Despite these changes brought on by the TCJA, home equity loans can still be an effective financing tool for some Washington homeowners. Compared to other strategies, it’s still one of the cheaper ways to borrow money. On average, the interest rates assigned to equity-based loans are generally lower than those applied to credit cards and some other forms of financing. The new law just means that the interest paid on some home equity loans in Washington State will no longer be deductible.
Disclaimers: We are mortgage professionals, but not tax policy experts. If you have questions about what is or isn’t deductible in your particular situation, you’ll want to refer them to your CPA or financial advisor.
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