Home Equity Loans allow Interest Deduction?

Taxpayers can continue to deduct the interest they pay on home equity loans when the funds are used for home improvements, the IRS confirmed in a statement on Wednesday. The status of home equity deductions has been in question following the limits on the mortgage interest deduction included in recent tax reform legislation passed in December.

In its statement, the IRS said despite the restrictions on mortgages, taxpayers can, in most cases, still deduct interest on home equity loans, a home equity line of credit, or a second mortgage.

The tax law,  the interest on a home equity loan used for building an addition to an existing home would generally be deductible. But interest on the same loan used to pay personal living expenses, like credit card debt, would not be.

The IRS offered scenario’s and details in describing how the new tax law works in these reference sources: IRS; “IRS Says Interest on Home Equity Loans Can Still Be Deducted,” Accounting Today (Feb. 21, 2018); National Association of Home Builders

More Home Owners Tap Into Equity, ‘Conservatively’

As home values rise, more home owners are tapping into their equity with cash-out mortgage refinances. But they’re not taking out nearly as much as they did in the past.

The average amount taken out by owners was more than $60,000. According to Black Knight Financial Services, the average loan-to-value ratio after the refinance was 67 percent – the lowest level ever. On average, borrowers then left 33 percent of equity still in the home after the cash-out refinance.

Forty-two percent of mortgage refinances last fall had borrowers who took cash out of their homes and did not refinance just to get a lower interest rate – the highest share since 2008, CNBC points out.

Source: “Owners Cautiously Taking Cash Out of Homes,” CNBC (Feb. 1, 2016)

Fewer Options for Home Equity Loans?

Bank of America says it’s ending the loans because it is working on “product simplification,” but Wells Fargo attributes its decision to the “Know Before You Owe” rule, which goes into effect Oct. 3. The rule — also known as TILA-RESPA Integrated Disclosure — brings new documents to the mortgage lending process.

Home equity loans come in two types: closed-ended (usually just called a home equity loan) and open-ended (referred to as a home equity line of credit). A HELOC involves revolving credit where borrowers can choose when and how often to borrow against the equity in the property (a lender sets an initial limit to the credit). On the other hand, a home equity loan is a one-time lump-sum loan, often with a fixed interest rate.

“Because closed-end loans were a small percentage of our overall home equity volume, we chose to focus on our line-of-credit offering and not to extend the resources required to retool our closed-end home equity disclosures to meet the new [integrated disclosure] regulations,” Wells Fargo told Bankrate.

Source: “Time to Say ‘Goodbye’ to Home Equity Loans?” Bankrate.com (Aug. 7, 2015) and “TRID Pushes Wells Fargo Out of Home Equity Loans,” HousingWire (Aug. 11, 2015)

Home Owners are Tapping Into Equity, Again!

Home equity lines of credit surged nearly 20 percent compared to a year ago and are now at the highest level since the 12 months ending in June 2009, according to RealtyTrac’s Home Equity Line of Credit (HELOC) Trends Report. HELOC originations comprised 15.4 percent of all loan originations nationwide during the first eight months of the year, the highest percentage since 2008.

“This recent rise in HELOC originations indicates that an increasing number of home owners are gaining confidence in the strength of the housing recovery and, more importantly, have regained much of their home equity lost during the housing crisis,” says Daren Blomquist, vice president at RealtyTrac.

Nearly 10 million home owners nationwide, representing 19 percent of all home owners with a mortgage, have regained at least 50 percent equity in their homes, RealtyTrac data shows. Meanwhile the percentage of home owners with severe negative equity has fallen from 29 percent in the second quarter of 2012 to 17 percent in the second quarter of this year, Blomquist notes.

Despite home equity lines of credit rising significantly in the past year, they still remain 76 percent below the 2006 peak reached during the housing boom, RealtyTrac notes.

Source: RealtyTrac


Trouble Ahead on Home Equity Loans?

Mortgage delinquencies are on the rise for home equity lines of credit that were taken out during the housing bubble and others reaching the 10-year mark, Equifax data shows.

In most cases, after these loans hit the 10-year mark, borrowers must start paying not only the interest but also the principal on these loans. For many, that could mean their monthly payments could more than triple. For example, a consumer with a $30,000 home equity line of credit with a 3.25 percent initial interest rate could see their monthly payments go from $81.25 to $293.16, according to Fitch Ratings analysts.

The number of home owners missing their payments is growing, Equifax reports. Amy Crews Cutts, the chief economist of Equifax, has called the pending increase in payments on home equity lines as a “wave of disaster.”

“More than $221 billion of these loans at the largest banks will hit this mark over the next four years, about 40 percent of the home equity lines of credit now outstanding,” Reuters reports. The delinquencies will mean banks stand to lose 90 cents on the dollar?

Analysts say that home owners who are facing a big jump in their payments may be able to refinance their main mortgage and home equity lines of credit into a new, single fixed-rate loan. Or some borrowers may find that selling their home and taking advantage of rising home prices is another way to repay their loan, analysts note.

Source: “Insight: A new wave of U.S. mortgage trouble threatens,” Reuters (Nov. 26, 2013)

New “Sweeping Changes” to Home Mortgage Rules!

The Consumer Financial Protection Bureau unveiled new mortgage rules Thursday that are expected to change how home buyers go about getting approved for a home loan. 

Loans that meet the agency’s new lending criteria now will be called a “qualified mortgage.” Every company that issues mortgages will be required to follow the new guidelines in order to receive protection from lawsuits for mortgage-backed bonds. Some types of loans will be excluded from these rules, such as interest-only mortgages and loans on which the principal balance rises over time.

A “qualified mortgage” will consist of the following:

Lenders must prove that income and assets are sufficient to repay the loan (this applies to jumbo loans as well).

  • Borrowers must be able to document their jobs.
  • Credit scores will have to meet a minimum standard.
  • Borrowers will have to be able to show that they can also still afford other debts associated with the home, such as home equity loans as well as property taxes.
  • Lenders will consider borrower’s other debts before issuing a mortgage too, such as student loans, car loans, and credit card debt.
  • Monthly payments must be affordable to the borrower.

The new rules will take effect Jan. 21. Lenders have a year to fully implement them. 

Source: “New Rules Aim to Make Mortgages Safer,” CNNMoney (Jan. 10. 2013)

Lenders Are Making More Loans

While the growth has been modest, banks are starting to make more loans again, The New York Times reports. Yet, the lending does tend to favor the strongest corporate and consumer borrowers, the article notes. 

With more stringent underwriting criteria the last few years, many borrowers have expressed concern over the increasing trouble in qualifying for a loan today. 

But “the narrative that banks aren’t lending is incorrect,” Timothy J. Sloan, Wells Fargo’s chief financial officer, told The New York Times. “Lending is strong, and based on what we’re seeing,” it will “continue to grow.”

Citigroup, for example, recently announced loan growth in the third quarter compared to a year ago in nearly all of its businesses.

The growth in loans is likely due to record-low interest rates, experts say. This seems to be true for the Placerville, El Dorado County, California regional market.

However, home lending still remains down. Mortgage and home equity loans have dropped more than 6.2 percent since peaking in late 2007 and early 2008, according to Federal Reserve data. 

“I don’t think the lending window is open near enough to what you need to see to get the economy growing, businesses expanding, and to bring the unemployment rate down,” Bernard Baumohl, the chief global economist at the Economic Outlook Group, told The New York Times.

Source: “Banks Start to Make More Loans,” The New York Times (Oct. 17, 2011)