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

Americans are sitting on more "tappable" home equity than ever. At the same time, borrowing is growing both costlier and trickier. Here's the scoop.

2 Things You Must Weigh Before Tapping Record-High 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  • An estimated $262 billion in tappable equity that was withdrawn last year through cash-out refinances and home equity lines of credit (HELOCs).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.

Karla Bowsher
Karla Bowsher
I’m a freelance journalist and former newspaper reporter who has covered both personal and public finance. I've worked for a top 50 major metro daily and a community newspaper as well as ... More

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