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By G. Steven Bray
With rising home prices, you may be eyeing your increasing home equity with plans for remodeling or some other important need. However, before you do, take a few minutes to consider how the changes to the mortgage interest deduction might affect your tax bill.
It’s been well-reported that the new tax law reduces the max mortgage that qualifies for the mortgage interest deduction from $1m to $750k. For most of us, that’s not a big deal. The bigger deal is that starting this year, interest paid on a home equity line of credit (HELOC) no longer will be eligible for the deduction.
When you take cash out of your home, you have a couple options if you have an existing first mortgage. You can refinance the first mortgage adding to the balance the amount of cash you want, a so-called cash-out refinance, or you can use a HELOC, which typically is a 2nd lien on your home that leaves the existing first mortgage in place. Many folks prefer a HELOC because they have a really low rate for their existing first mortgage.
With the new tax law, the interest paid on a cash-out refinance is still eligible for the mortgage interest deduction. The interest paid on a HELOC is not.
So, before you decide which option to use, consider whether getting a new first mortgage would allow you to itemize your deductions. If it does, then you may find it’s a better financial decision to cash-out refinance your existing mortgage even though you may end up with a slightly higher interest rate.