This note is for the personal tax planning of our clients and friends.
With the passage of the new tax law, the interest expense you pay on any home equity line of credit (“HELOC”) is no longer deductible on your federal return. However you can carry up to $750,000 in a first mortgage and still deduct all the interest paid on your first mortgage. Couple that with the rising trend of interest rates, including mortgage loan interest, and the message for this year’s tax planning might be this:
If your first mortgage and your HELOC combined are $750K or less, it may make sense to refinance now and roll that HELOC into a new first mortgage. You can even afford a bit of an increase in the new first mortgage rate if it is more than offset by the retained tax deduction for HELOC interest expense. An exception might be if your first mortgage interest rate is significantly lower than today’s available rates, and your HELOC balance is fairly low. Then you may be better off by just foregoing the HELOC deduction. The key calculation: your combined mortgage interest expense less your tax deduction before a refinance compared to that same number after a refinance.
As always, tax planning ideas like this one should always be discussed with your tax adviser who is familiar with your particular situation. We are not tax advisors, but we are Your CFO for Rent.