Real Estate
February 21, 2018
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New tax bill 2018: Why people should refinance

By: Scott Sheldon
January 19, 2018

The new 2018 tax plan is spelling unwelcome news for mortgage borrowers who hold home equity lines of credit. Here is what to know if you have a home equity line of credit or a second mortgage on your home…

What are home equity lines of credit?

Home equity lines of credit are essentially enormous credit cards tied to your home. A home equity line of credit also known as a Heloc, is a flexible financing vehicle used for tapping one’s home equity as they provide interest only, low rate low payment affordability.

The ominous fact about home equity line of credit is that they are indeed variable rate just like your credit card is. They are pegged to the prime rate plus a margin. The prime plus the margin interest rate is your fully indexed interest rate and that’s the amount of interest that you’re paying on.

Fixed rate second mortgages

Let’s say that you took out a fixed rate second mortgage to avoid the variable rate component of an equity line of credit. These loans are also not tax deductible as they are treated like equity lines of credit unless you used the second lien as acquisition indebtedness. For example, let’s say you have a fixed rate second mortgage on your house you took out a few years ago to put in some landscaping and redo your kitchen. Because this was used for cash out purposes and was not used for acquisition debt this is not tax-deductible anymore, much like a home equity line of credit is no longer deductible.

Concerns consumers may have to refinancing 

A few reasons that people do not like paying off their home equity line of credit are as follows:

Paying off the second mortgage themselves through income or savings – most who have the debt would pay it off if they could through their savings or income.

Ultra-low rate on the first mortgage- the blended rate of the first and second mortgage is far likely to be higher than current first mortgage rates when factoring in the total interest expense.

If you are looking to do a mortgage or have questions about what it might take to pay off your first and second mortgage, work with a local mortgage lender who thoroughly understands your financial picture.

Start with an easy quick quote now.

Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.