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 borrow against, according to Black Knight. This is measured as the amount of equity between the combined outstanding mortgage debt and the upper limit of 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.