Smart About Money: Tax reform & home equity loans

By Nick Maffeo

This month’s Smart About Money is featured in the Canton Citizen’s annual Financial Fitness Guide, included with the March 1 edition.

That was the headline of an article in The Washington Post in January. Considering that millions and millions of homeowners have home equity lines and loans (and love them), it was pretty alarmist.

Nick Maffeo

“Did the tax code overhaul kill home equity loans?” The answer is no. Home equity lines and loans are alive and well. Even The Post eventually admitted it later in their story.

The Boston Globe coverage wasn’t very helpful either. Their headline was: “Bad news, homeowners: Tax bill would end deduction for interest on home equity loans.”

Key word there: “would.” The Globe’s article was written in December, before the tax code overhaul was passed. They could have said “might end” and that would have been more accurate. Because at that point, no one knew for sure what changes were actually going to happen.

Here’s what has actually happened and what it might mean to you.

Right now, it looks like home equity interest can only be deducted if the loan is used to buy or substantially improve your home.

Some tax specialists and CPAs always believed that, under the old law, that was the only part of the interest paid that was deductible. So it might be fair to say that this new tax code is a clarification. Many taxpayers were deducting all of their home equity line interest, no matter what they had bought or paid for. Others were with CPAs who read the tax code differently, allowing their clients to only take a deduction for home-related expenses. It is good to have clear rules and a level playing field for all taxpayers.

Many people will say that having a mortgage is good for your taxes — because of the deductibility of the interest paid on a home mortgage. Presumably they would say the same thing about home equity lines and loans.

The fact of the matter is that keeping a mortgage or home equity loan for the deduction is usually a net loss. Since the deduction you get is almost invariably much less than the interest you pay, most people who do the math see that the deduction was never worth as much as they thought or hoped.

Being able to deduct the interest is a nice plus when you are still paying off a mortgage. It’s a bit of an encouragement to own a home. But paying off loans as soon as you can and decreasing your monthly expenses is 100 percent the way to go.

Are people going to abandon the very popular home equity lines because the interest is not 100 percent deductible anymore? Why would they when an equity line provides homeowners with super-convenient access to their equity at rates that are very favorable compared to the alternatives, especially compared to credit cards and bridge loans.

There are financial pundits who are suggesting homeowners will be better off rolling their equity lines and loans into a new mortgage to maintain the deductibility of the interest paid. That could make sense for some, but then there are the mortgage closing costs that could wipe out any real savings for years. So that’s an idea you would want to explore very carefully with your banker and tax advisor.

Here’s some good news: You have plenty of time to figure out your next move. This new law applies to 2018 taxes, which are not due until April 2019.

More good news: The increase in the standard deduction could mean that the loss of the home equity interest deduction is a wash for many homeowners. You might even come out ahead. This is one of those situations where the only right answer for any individual is, “It depends.” Taking your time and talking to your financial advisors is the best way to get the answer that’s right for you.

Nick Maffeo is the president and CEO of Canton Co-operative Bank in Canton. Have a question? Email to submissions@thecantoncitizen.com.

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