Posts Tagged ‘tax reform’

HELOC interest potentially tax deductible

February 27, 2018

A clarification has been issued by the Internal Revenue Service about the deductibility of interest that is paid on home-equity lines.

Under the Republican tax law, joint taxpayers can deduct interest on home loans. This includes first mortgages used to secure primary and secondary homes. OK. Sounds right. Nothing unusual so far…

What caused a ruckus was the suspension of the interest deduction for home-equity loans, home-equity lines of credit and second mortgages from 2018 until 2026.

But an exception exists!

WHAT?? Really? Tell me more!

The IRS clarified the new tax law in response to many questions submitted to the IRS by taxpayers and tax professionals. According to IR-2018-32 issued Tuesday by the agency, when HELs & HELOCs are utilized to buy, build or substantially improve the residential properties used as security for the loans, the interest is tax deductible. An example of a deductible expense is when the proceeds from the loan are used to build an addition to an existing home. On the other hand, if the proceeds from lines of credit are utilized to pay off personal expenses, no deduction is allowed.

As was the case under the prior law, the equity line loan must be secured by a primary residence or second home, not exceed the cost of the home, and meet other requirements.

How to proceed? Contact your tax professional. While the IRS provided the clarification, it also said “meet other requirements.” The IRS also did not distinguish how to apply if portions of the equity line was used. For example, what if someone has a $100,000 equity line. They use $80,000 for an addition to the home, but $20,000 to pay off credit card debt.

While this is welcome news, its application can still be tricky. Contact your tax professional today to find out more. If you need a referral to a tax professional, do let me know!

Republican tax plan and mortgage rates

December 12, 2017

All signs are pointing to the Republican party passing tax reform. The Republicans are using the “budge reconciliation” process to get the bill passed. By going this route, the Republicans avoid the need for 60 votes for approval in the Senate while preventing the Democrats the ability to use  a filibuster. Whether you opposed tax reform OR couldn’t wait until it arrived, tax reform seems likely to be here once the House and Senate finish reconciling their two tax reform bills.

What does this mean for mortgage rates?

Initially, nothing. On the surface, tax reform has no direct impact on mortgage rates. This is just like when the Federal Reserve raises the Federal Funds Rate. The Funds rate impacts second mortgages, car loans, credit card rates, etc., and not mortgage rates. But…. the impact these have on the market can impact mortgage rates.

Stocks have been on a major rally for roughly two years now. The DOW continues to set record highs. Why the surge? Wall Street has bet on tax reform that would benefit business. Trump’s election prompted a big rally back in November 2016, and this rally continued throughout 2017.

Now that tax reform is here, stocks seem poised to continue their good run and maybe continue to push higher. As stock values rise, bond prices normally fall due to the fact that people are putting more money into stocks than bonds. As bond values fall (specifically mortgage backed security bonds), mortgage rates go up. While tax reform doesn’t directly affect mortgages rates, the impact on stocks can influence mortgage rates.

Frequent readers of this blog are aware of how stock prices/mortgage backed security bond prices impact mortgage rates. If you are new to this blog, use this link to read past posts about the subject. 

Currently mortgage rates are definitely off of their yearly lows and moving back toward their yearly highs of 2017. Combine tax reform, continued stock market rally, and the Federal Reserve no longer purchasing bonds from quantitative easing (they are beginning to sell their bonds now), and you have an environment where mortgage rates could go noticeably higher.

Market analysts have said for years now (since 2010) that “this is the year mortgage rates go up,” and rates haven’t gone up. When do I think rates will go up? At this point, I’ll believe it when I see it. That said, the environment for mortgage rates to increase is as real as it has ever been in the past several years.

Considering refinancing or buying a home, but been pushing it off since rates are so low? Maybe now is the time to at least have a conversation about your plans, timing, and how to proceed? If the home loan will be in the state of Georgia, I can help! Contact me today and we’ll get started!