2 Things You Must Weigh Before Tapping Record-High Home Equity

home equity
Photo by Andrey Armyagov / Shutterstock.com

If you own a home, there is a good chance you’re tempted to dip into its value and spend a little of that wealth.

“Tappable” home equity in the U.S. now totals $5.4 trillion. That’s the highest amount on record — 10 percent higher than the previous peak, reached in 2005, according to the latest monthly mortgage report from analytics firm Black Knight.

Tappable equity, or lendable equity, refers to the total amount of equity that a homeowner with a mortgage can borrow against.

Other record highs from the report include the post-recession peaks of:

  • $735 billion by which tappable equity increased last year.
  • An estimated $262 billion in tappable equity that was withdrawn last year through cash-out refinances and home equity lines of credit (HELOCs).

To tap or not to tap?

So, should you take advantage of this seemingly big opportunity to borrow. It depends. To find the answer, let’s imagine you plan to borrow against your home equity to remodel.

Whether you should do so depends heavily on the amount of money you would pay to borrow — such as in interest payments and fees — and the amount by which remodeling would increase your home value.

If the costs of borrowing exceed the increase in your home value, borrowing would leave you poorer.

As Money Talks News founder Stacy Johnson has starkly put it:

“When you borrow, you’re paying someone to temporarily use their money. If what you buy with that money goes up in value by more than what you pay to use it, you get richer. If it doesn’t, you get poorer.”

In addition, deciding whether to borrow against home equity — for a home remodel, or any other purpose — is an even more complicated decision in 2018 than it was in years past. That is because of two big recent changes:

1. Interest rates are rising

The Federal Reserve has been steadily increasing the federal funds rate for more than two years now. That means that most types of debt are bearing higher interest rates, or soon will.

HELOCs and home equity loans are not immune to such rising interest rates. A home equity loan or HELOC that you take out in 2018 is still likely to cost you more in interest than it would have a few years ago.

And if you already have a HELOC, watch out: Unlike existing home equity loans, rates on existing HELOCs are likely to increase as interest rates in general trend upward. Typically, a HELOC comes with a “draw” period of several years. This is the time when you can borrow money. During that time, most HELOCs are tied to adjustable rates, meaning your costs can fluctuate.

If you are beyond the draw period and are in the “repayment” phase, you probably have less to worry about. HELOCs in this phase of their lifetime typically convert to a fixed-rate loan.

2. The tax code has changed

The recent overhaul of the federal tax code by Congress temporarily altered the circumstances under which the interest on home equity loans and HELOCs is tax-deductible.

Initially, it appeared that such interest would not be deductible under any circumstances from tax year 2018 through tax year 2025. But the Internal Revenue Service has since clarified that the interest remains deductible in select situations.

The agency explained in late February:

“The Tax Cuts and Jobs Act of 2017, enacted Dec. 22, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.”

So, you can forget about deducting interest if you, say, spend the proceeds of a home equity loan on personal living expenses like credit card debt.

Even if you spend it on a remodeling project, however, realize the IRS has other requirements that must be met before you can write off the interest. Talk to a tax professional before taking out a home loan or HELOC if you want to be certain you will be able to deduct the interest.

What’s your take on tapping home equity these days? Share your thoughts below or on Facebook.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
10 Colleges That Offer Free Tuition for Seniors
10 Colleges That Offer Free Tuition for Seniors

These schools let retirement-age students study, tuition-free, while earning college credit.

It’s Worth Paying More for These 7 Things
It’s Worth Paying More for These 7 Things

Sometimes, the difference in quality makes it worthwhile to open your wallet a little wider.

10 Places Where Social Security Offers the Best Standard of Living
10 Places Where Social Security Offers the Best Standard of Living

These U.S. counties offer retirees a chance to stretch their benefit checks while enjoying their golden years.

10 Mistakes That Cost You Money at Warehouse Stores
10 Mistakes That Cost You Money at Warehouse Stores

Wholesale clubs might have great deals, but these mistakes will cost you.

How to Invest in Real Estate for as Little as $500
How to Invest in Real Estate for as Little as $500

If stock market volatility has you looking for other investment options, here’s a way to diversify — even if you don’t have tons of money.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

11 Things Retirees Should Always Buy at Costco
11 Things Retirees Should Always Buy at Costco

This leader in bulk shopping is a great place to find discounts in the fixed-income years.

Over 50? The CDC Says You Need These 4 Vaccines
Over 50? The CDC Says You Need These 4 Vaccines

Fall is the time to schedule vaccines that can keep you healthy — and even save your life.

11 Senior Discounts for Anyone Age 55 or Older
11 Senior Discounts for Anyone Age 55 or Older

There is no need to wait until you’re 65 to take advantage of so-called “senior” discounts.

11 Household Items That Go Bad — or Become Dangerous
11 Household Items That Go Bad — or Become Dangerous

When you get the impulse to stockpile these everyday items, pay close attention to their expiration dates.

8 Things You Can Get for Free at Pharmacies
8 Things You Can Get for Free at Pharmacies

In this age of higher-priced drugs and complex health care systems, a trip to the pharmacy can spark worry. Freebies sure do help.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

The 10 Most Commonly Stolen Vehicles in America
The 10 Most Commonly Stolen Vehicles in America

A new model parks atop the list of vehicles that thieves love to pilfer.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

The 15 Worst States for Retirees in 2020
The 15 Worst States for Retirees in 2020

Based on dozens of metrics tied to affordability, quality of life and health care, these are not ideal places to spend retirement.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

10 Reasons Why You Should Actually Retire at 62
10 Reasons Why You Should Actually Retire at 62

If you can, here are several good reasons to retire earlier than we’re told to.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

26 States That Do Not Tax Social Security Income
26 States That Do Not Tax Social Security Income

These states won’t tax any of your Social Security income — and in some cases, other types of retirement income.

5 Keys to Making Your Car Last for 200,000 Miles
5 Keys to Making Your Car Last for 200,000 Miles

Pushing your car to 200,000 miles — and beyond — can save you piles of cash. Here’s how to get there.

14 Things That Are ‘Free’ With Medicare
14 Things That Are ‘Free’ With Medicare

These services could save you money and help prevent costly health problems.

5 Things That Make Life More Meaningful for Retirees
5 Things That Make Life More Meaningful for Retirees

Retirees agree: These are the things that give them purpose and fulfillment in their golden years.

15 Amazon Purchases That We Are Loving Right Now
15 Amazon Purchases That We Are Loving Right Now

These practical products make everyday life a little easier.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.