Beginning January 1, 2018, the new tax law restricts how and when interest can be deducted on a home equity line of credit (HELOC) or second mortgage.
Before the tax law change, home equity loans and second mortgages were popular ways for homeowners to borrow money to pay for college, vacations, a new car, etc., because the interest on the loans could be deducted. Now, if borrowers want to deduct the interest on a HELOC or second mortgage, they must use the proceeds only for substantial improvements to the home. Additionally, the combined total of their first mortgage balance and the HELOC or second mortgage cannot exceed the new $750,000 limit to qualify for the mortgage interest deduction. The previous ceiling was $1.1 million for first mortgage and HELOC combined.
Does this mean home equity loans will go away? Not at all. With or without the interest deduction, HELOCs and second mortgages are likely to remain popular ways for homeowners to tap some of the equity in their homes at attractive interest rates, and lenders will assuredly continue to offer these products. But remember, if you want to deduct the interest on a HELOC or second mortgage, you must use the proceeds only for qualified home improvements.