Why Tapping Your Home Equity in 2018 Might Be a Big Mistake

Homeowners are spending more money on renovations big and small, funded with the help of their home equity, CNBC reports.

The National Association of Home Builders projects this trend will only strengthen in 2018, with renovations of owner-occupied, single-family homes increasing by 4.9 percent from 2017.

But this news comes as tapping home equity becomes more expensive under the newly overhauled federal tax code.

Why home equity debt is attractive

The current state of the housing market has contributed to the recent rise in renovations, according to CNBC.

Perhaps most notably, home values continued to climb in 2017, as the housing market continued to heat up. That means many homeowners now have more home equity to tap, such as by taking out a home equity loan or home equity line of credit (HELOC) to fund home improvements.

Additionally, fewer new homes are being built. That makes renovation the only option for some folks seeking to upgrade their digs.

Others are tapping their home equity to be able to buy more real estate, though, while some are investing their home equity in a different financial market, the seemingly ever-rising stock market.

Why you should reconsider home equity debt

In the past, one of the big arguments for home equity debt was that interest paid on home equity loans and HELOCs was tax-deductible.

The tax overhaul that President Donald Trump signed into law on Dec. 22 negated that argument, however.

The overhaul nixed the tax deduction for home equity indebtedness, making it unavailable from tax year 2018 through tax year 2025. In other words, the 2017 tax return you’re hopefully planning to file soon is your last chance to claim that tax deduction until 2026.

We detail these changes in “3 Costly Ways Homeowner Tax Breaks Will Change in 2018.”

Basically, the overhaul has fundamentally altered the way homeowners should weigh whether to tap their home equity anytime in the next eight years. For example, if you’re considering a home equity loan or HELOC, now you must ask yourself:

• Is the debt still worth taking on if I can’t write off the interest expense?
• Would I be better off postponing taking on the debt until closer to 2026?

And then you must consider that interest rates on variable-rate debts like HELOCs are liable to rise in 2018, because the Federal Reserve is expected to continue to hike the federal funds rate.

So, some types of home equity debt are becoming more expensive in more ways than one.

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