Tax Cuts and Jobs Act To Make Home Equity Loans Less Attractive

The Tax Cuts and Jobs Act may make home buying a less attractive decision. According to Star Tribune, the new tax measure signed on December 22, 2017, by President Donald Trump could make it more difficult for homeowners to borrow against their property.

Home equity loans have long been a popular choice for homeowners looking to borrow money for home improvements or to pay off credit cards. Because the interest on the loans was deductible, homeowners saw no reason not to borrow against their homes.

However, the new tax measure will no longer allow this deduction on home equity loans. This is true both for current home equity loans and for those taken out in the future.

“This is a policy that removes the incentive to treat your home equity as an ATM,” said Daren Blomquist of ATTOM Data Solutions.

The tax measure will cost those with home equity loans thousands of dollars in the future. However, the decision to pass the law was to deter homeowners taking out loans they wouldn’t be able to pay back.

According to Star Tribune, home equity loans were one of the key problems during the nation’s previous recession. In the past, homeowners took out unmanageable home equity loans to make improvements on their houses.

For instance, up to 69% of homeowners report using their backyards for relaxing. Additions such as an outdoor kitchen could not only improve an entertainment space but also see an ROI up to 200%.

Considering up to 71% of grillers report adding smokers to their grills just to improve the flavor of their food, it isn’t surprising that so many homeowners are making huge renovations to improve their everyday life. However, borrowing large sums of money to pay for grand improvements can easily become dangerous. For instance, in the Twin Cities, there were up to 5,970 new equity loans taken out during the third quarter of 2017 alone.

In 2018, homeowners are expected to spend up to $330 million on renovation projects according to Harvard University. But what’s causing the increase in spending?

Because housing prices are so high and there are only so many housing options to choose from, many homeowners choosing to stay in their own properties. However, to spruce up their current homes, homeowners will then borrow money to renovate.

“The change in the tax law should be a small positive in the long run as it removes some of the incentive for households to borrow against their home equity for short-term consumption as occurred during the housing boom,” said Cristian deRitis, the senior director of Moody’s.

However, according to Bankrate.com’s chief analyst Greg McBride, homeowners will still see home equity loans as viable financial options. “It’s still cheaper than a credit card,” McBride said. “If you put a $30,000 addition on your home, it’s still going to be a favorable way to borrow.”

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