Great News! Interest on HELOCs used for the Mortgage Magic System should still be deductible.
The new tax law passed at the close of 2017 places restrictions on Interest deductibility of home equity lines of credit (HELOC). Beginning in 2018 And continuing until 2026, homeowners can lose the, tax-deductibility of interest they pay on their home equity lines under certain circumstances. in general, HELOCs that are used to pay personal living expenses, such as credit card debt, is no longer deductible.
However, borrowers can still deduct interest on a home equity loan, home equity line of credit or second mortgage if the funds are used to buy, build or substantially improve the taxpayer’s home that secures the interest. Under that definition, the use of a HELOC in conjunction with the Mortgage Magic System would qualify for the deduction.
In the tax legislation signed by President Donald Trump, the rules for deducting interest on home equity loans are getting tighter. The Tax Cuts and Jobs Act of 2017, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.
But does the loss of the tax deduction make home equity loans a bad deal if you want to pay off credit card debt? What alternatives exist? Here are three thoughts on the new legislation, and its impact on borrowers.
1. Even without the deduction, home equity will likely remain one of the cheapest ways to borrow money (if you can get approved). And these loans remain much cheaper than credit card debt.
Lenders became too aggressive with home equity loans and lines of credit before the financial crisis. However, when underwritten properly, home equity lending offers an excellent risk-return profile for lenders. Because these loans are secured by real estate, interest rates are much lower than unsecured personal loans or credit cards. Many home equity line of credit products offer rates near or below 5%. Personal loan interest rates typically start above 5%, and can go much higher.
For homeowners using a HELOC in conjunction with our equity accelerator (Mortgage Magic System), we advise that the HELOC loan be not more than two months of income. This means that interest accrued on the HELOC will always be extremely small.
The ability to get a tax deduction on home equity loans made home equity loans even cheaper. Even without the deduction, home equity remains cheaper than personal loans and credit cards (with an average rate of 14.89%), and can be a very smart way to pay off that debt.
Just be warned: after the financial crisis, lenders tightened approval criteria for home equity products. Although it is a little easier today than 2009 to get approved, banks remain strict.