For decades, homeowners have turned to cash out refinancing and HELOCs to receive low interest money and to maximize tax deductions observed by the Internal Revenue Service. The GOP led Congress made some changes in 2018 that may change the value of mortgage refinancing for cash back when it comes to leveraging tax deductions. Let’s examine the impact of the new tax rules for cash out mortgages going forward.
New Tax Laws Impact Homeowners Ability to Deduct Mortgage Interest on Cash Out Refinance Loans
Home prices are as high now as they have been any time since the height of the last recession in 2008 and 2009. The amount of equity homeowners have in their homes today reached a record high in the third quarter of 2017 with 42 million homeowners having $5.5 trillion of equity in their properties. This was $3 trillion more than what they had five years ago when the housing market bottomed out. According to sources, tap-able equity is defined as the amount available for the homeowner to borrow before they reach 80% loan to value against the property.
After the housing crash, millions of families fell underwater on their homes and owed more than it was worth. Fast rising home prices have brought millions of homeowners above water and many have a lot more money than that. At least 80% of homeowners have equity they can use; this is cash that can fuel the US economy. Only 2.7% of homeowners today owe more on their home than it is worth.
There are two major ways to get cash out of a home that has equity. The first is to refinance the first mortgage into a bigger loan. This may be a good move if interest rates currently are lower than your rate on your mortgage by ½ a percent or more. If you do not want to redo your first mortgage because rates are too high today, the other option is to do a home equity line of credit or a HELOC.
Whichever you are considering, it is important to be aware of the new tax laws passed by the Republican congress that affect what mortgage interest you can write off. For a cash out refinance on the first mortgage, borrowers are still able to deduct mortgage interest on $750,000 worth of mortgage debt. This is a decrease of $1 million from the old law. However, if you decide to do a HELOC, you cannot deduct the interest on this loan anymore. In the old days, you could deduct interest that was paid on up to $100,000 of home equity loan debt. This is a major change that could affect the number of people who get a second mortgage. This change also affects home equity loans.
People who want to do home improvements may need to look at other financing options, including personal loans and construction loans. Also some people may decide rather than pulling out cash, they want to pay down their current home equity loan faster. They are no longer getting that tax deduction they had before and interest rates are going up. Still the IRS recently reported that some homeowners still might be able to write off their second mortgage interest.
The change on mortgage interest deductions on a cash out refinance loan of the first mortgage can have a particular effect in wealthier areas of the country. Most of the country does not live in homes worth $1 million or more, but this law change will have an effect in states such as California, Washington, Connecticut and New Jersey.
In 2018, borrowers are looking at interest rates and the tax law changes and are doing more cash out refinances of their first mortgage. As of the last quarter of last year, $68,000 in equity on average for a total of $26 billion was taken out by people doing cash out refinances. Cash out refinances are 62% of all refi’s done today, but this is a lot less than in the golden years of the housing boom of 2005, when people were using their homes as ATMs.
Those days won’t likely return because lenders are more risk averse today and mortgage underwriting is stricter. Borrowers also are showing more restraint than in the past. Some homeowners do not want to risk tapping their equity.
According to a spokesman at Loan Depot, “The demand for homeowners needing access to cash doesn’t seem to be going away anytime soon.” The national mortgage lender headquartered in Southern California confirmed that applications for cash out refinancing have increased in 2018, even after the new tax laws went into effect.
If you want to do a cash out refinance to take advantage of the tax law and current low rates, remember that you will have to pay closing costs when you do any new mortgage. Just as with the original loan, it is important to compare your closing costs and rates. Like your first mortgage, typical closing costs can run from .8% to 1.3%. Some lenders could quote a base rate of interest and provide an option to pay the rate down. This is done by paying points, which is equal to one percent of the balance of the loan. So before you get blown away by the super low rate, ask if point purchase is included in that.
The bottom line is a cash out refinance is in many ways more attractive now than doing a second mortgage. But if you already have an attractive first mortgage rate, you may still want to consider doing the second, even without the old tax advantage.
6 Reasons Why Cash Out Mortgage Lending Continues to Soar
It is 2018, and it seems that the popularity of cash out mortgage lending is soaring. If your home has increased in value and you have been diligently been paying down your mortgage, you may be eligible for a cash out refinance. With a cash out refinance, you may be able to get cash that has built up in the value of your home. Most states and lenders allow you to borrow up to 80% of the loan to value, or 85% for FHA loans. People opt for a cash out refinance on their first mortgage if they want to get a lower interest rate and also want to pull out cash
Below are some of the reasons that cash out mortgage lending is growing in popularity in 2018.
Home Values Are Going Up
The economy has been doing well overall since Trump took office. Some will argue why this is the case, but most experts acknowledge the economy is growing well. Some people think we could see near 4% growth in 2018. If that happens, this would be the first time it has happened for an entire year in 14 years.
The stock market also has been going up, and unemployment is low. As the economy has gathered steam, home prices have continued to rise. On average, homes have been increasing in value by 5-8% per year for the past two years. Some expensive parts of the country have seen home values rise by 15% a year or more.
When home values rise, the amount of equity in the home also goes up. So, as homes grow in value, more Americans are opting to pull out cash when they refinance.
It is expected that people will continue to want to pull out cash as home values continue to rise.
Lending Standards Have Eased
The financial crash made pulling out equity challenging for a few years. But today, lending standards are getting easier. It is possible to do a cash out refinance on your home with a 640-credit score, as long as you have reasonable debt and documented income to support the new loan.
Interest Rates Are Low
It is true that rates are higher than a year ago, but they are still historically very low. When interest rates are low, more people want to refinance their first mortgage. According to Zillow, as of March 2018, mortgage rates are in the area of 4.3% or so. This is higher than they were, but if you have a mortgage from a decade ago, you still could save 1% on your mortgage interest rate.
If you are thinking about refinancing and pulling out cash, you could want to do it sooner than later. The economy is heating up, and inflation is on the rise. So it is increasingly likely that the Federal Reserve will increase rates soon. This should cause mortgage rates to rise. They have stayed somewhat lower than expected for the past two years. But now that inflation is going up, it seems likely that rates will increase soon.