House as ATM: Mortgage Interest Deduction Remains, But…Submitted by Financial Planning Solutions, LLC on February 8th, 2018
For the last couple of decades, homeowners have benefited from a tax-deduction for the mortgage interest they pay on their residence. Some would say that as a result homeowners have been using their homes as an ATM machine by making withdrawals at low rates whenever they need money. This incentive has helped propel home ownership and, the housing and real markets for many years. However, the new tax law made several changes to it.
Now new homebuyers can deduct mortgage interest expense only up to $750,000 on a first or second home. The old limit, which still applies to existing mortgages, was $1 million.
The result is that new homeowners in high cost regions, such as Massachusetts, will receive a smaller benefit from this tax deduction.
What about refinancing an existing mortgage? The National Association of Realtors says that a homeowner with an existing mortgage of $1 million on December 14, 2017 can refinance it up to $1 million and still deduct the interest. However, if you have paid down the balance to say $850,000, you can still deduct the interest on the new mortgage as long as the new mortgage amount does not exceed $850,000.
So, if a homeowner has an outstanding mortgage of $850,000 and is planning to set up a $100,000 home equity line of credit (HELOC) to pay for renovations, the interest on that HELOC will not be tax-deductible.
Given that many HELOCs are set up to pay for renovations or additions, the new tax law removes an incentive to use HELOCs for these purposes.
HELOCs are also sometimes used for other purposes such as paying for college or other big expenses. When you consider that HELOCs have a variable interest rate, the rising interest rate environment may also cause interest in HELOCs to significantly wane.
While we are disappointed the tax-deductibility of mortgage interest has been reduced for some large mortgage holders in the future, we think that it makes sense that large mortgage borrowers may not necessarily need incentives to take out a big mortgage.
Still have questions about the mortgage interest deduction under the new tax law, give us a call. We’re here to help.
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