As featured in Star Advertiser on June 03, 2018.
Victor Brock is senior vice president, Consumer and Mortgage Lending, at Hawaii State FCU.
Homeowners are in luck: Many Hawaii home values have risen over the past few years and are continuing to trend upward. That means many people may now have a lot of equity in their homes.
Those interested in tapping that equity may have heard troubling news that the new tax law — the Tax Cuts and Jobs Act of 2017 — no longer allows homeowners to deduct interest on home equity loans and home equity lines of credit (HELOCs). However, that’s not quite the case. The IRS recently issued an advisory that clarifies the rules for deducting interest on home equity products used to buy, build or substantially improve their residence. This and other market trends may help you decide how to take advantage of your home equity.
The effects of rising interest rates
In the past few months, mortgage rates have climbed from about 3.5 percent to 4.5 percent, and many expect rates to keep rising. Not surprisingly, demand for mortgage refinancing is slowing way down. If you have a lower interest rate, it may not make sense to refinance your entire balance into a higher interest rate than your current rate. Therefore tapping into your equity using home equity financing may make the most sense.
Rising mortgage rates coupled with low inventory could make homeowners think twice about upgrading to a new home, because the rate on their new mortgage may be substantially higher than their current rate, making the new home mortgage payment that much less affordable. Homeowners opting to stay where they’re at and to make improvements to their current residence might make more financial sense. Experts are seeing more and more homeowners turn to HELOCs to fund these renovations.
Return of the HELOC
HELOCs began rebounding from the housing market crash in 2011, and have steadily grown in popularity since then. TransUnion estimates 1.6 million HELOC originations in 2018 as more homeowners look beyond traditional refinancing to access the equity in their home.
A HELOC may allow for greater flexibility than refinancing or even home equity loans. A HELOC provides you with a set credit limit against which you can borrow over a period of time. The length of time varies based on the terms of your loan.
Plus, a HELOC offers you the flexibility to reborrow the amount that you paid back while still within this time known as the drawn period. You can borrow what you need and only pay interest on the portion of the loan that you use.
Most HELOCs have a variable interest rate, which fluctuates over time. Some lenders, such as Hawaii State FCU, allow borrowers to “fix” the rate on a portion or all of their line balances, which protects them from rising interest rates. Check with your lender to see if this option is available, as it may save you money in the long run.
Tax advantages of HELOCs
While the 2017 tax reform law placed some limitations on tax deductions related to HELOCs, there are still a few benefits to take advantage of. Talk with your tax consultant before opening a HELOC to be sure you understand the tax implications.
In order to take a tax deduction on HELOC debt, the money must be used to buy, build, or make substantial home improvements or renovations. Homeowners should keep records of how their HELOC funds are used so they can maximize their tax benefits.
Even if funds will not be used to make home improvements, home equity financing may be the best way to finance other needs, such as educational expenses or vehicle purchases, or to consolidate other higher-interest debt, because the interest rates on home equity loans and line of credit are typically lower than other types of financing.
While there’s no telling what the future holds, HELOCs can be a smart solution for homeowners flush with equity who are looking to add value to their home and to minimize their overall interest expense. Homeowners can take advantage of the tax deductions still available to maximize their benefits, but should remember to borrow responsibly when using their home as collateral. Check with your lender to decide if a HELOC makes sense for you.