HELOC vs. cash out refinance decision gets trickier after tax reform

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HELOC vs. cash out refinance decision gets trickier after tax reform


The aggregate amount of tappable home equity is at an all-time high, but the best option for a consumer to access those funds changed with the revised tax code.

As of the end of the third quarter, there are 42 million homeowners with an aggregate of $5.4 trillion in equity they can borrower against, according to Black Knight. This is measured as the amount above an 80% loan-to-value ratio.

That is up by more than $3 trillion since the bottom of the market in 2012.

Home equity lines of credit would normally be considered the best way to access that credit in a rising interest rate environment.

“However, with the recently passed tax reform package, interest on these lines of credit will no longer be deductible, which increases the post-tax expense of HELOCs for those who itemize,” said Ben Graboske, Black Knight data and analytics executive vice president, in a press release.

“While there are obviously multiple factors to consider when identifying which method of equity extraction makes more financial sense for a given borrower, in many cases, for those with high unpaid principal balances who are taking out lower line amounts, the math still favors HELOCs. However — assuming interest on cash-out refinances remains deductible — for low-to-moderate UPB borrowers taking out larger amounts of equity, the post-tax math for those who will still itemize under the increased standard deduction may now favor cash-out refinances instead, even if the result is a slight increase to first-lien interest rates.”

But it remains to be seen over the long term what the effect of the changes to the tax code have on a homeowner’s decision to tap equity via a cash-out refi or a HELOC, he continued.

Meanwhile, only 2.7% of borrowers owed more on their mortgage than their house was worth, the lowest such rate since 2006, Black Knight said. Underwater borrowers declined by 37% or 800,000 through the first three quarters of 2017.



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