How Home Equity Loans Have Become a Worse Deal for Homeowners

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One of the main reasons homeowners take out a home equity loan is to consolidate unsecured debt (typically credit card debt) so they can pay it off at a lower rate of interest. A sometimes unexpected, but welcome, side benefit was that the interest paid on a home equity loan was tax deductible. No more.

The Republican tax plan that passed into law last December eliminates the tax deduction for home equity loan interest beginning this year. If you already have a home equity loan and have been taking the deduction, that is no longer possible. And if you are considering getting a new home equity loan, make sure that it is still a good deal without the tax deduction.

Researchers at consumer finance firm LendEDU conducted an online survey of 1,000 Americans adults over the age of 18 and screened the results to identify consumers who reported owning a home and who also currently have a home equity loan.

Here is the first question asked on the survey along with the five answers respondents were asked to choose from and the percentage of respondents who picked the answer:

Which of the following correctly describes how the new tax code impacts the treatment of home equity loans?

A. The new tax code will not impact the treatment of home equity loans.
19.70% chose this answer.

B. Advantageous to home equity loan borrowers by increasing the proportion of interest deductible.
25.40% chose this answer.

C. Disadvantageous to home equity loan borrowers by increasing the proportion of interest deductible.
8.80% chose this answer.

D. Advantageous to home equity loan borrowers by decreasing the amount of interest deductible.
8.50% chose this answer.

E. Disadvantageous to home equity loan borrowers by eliminating the borrower’s ability to deduct interest costs.
4.40% chose this answer.

F. Unsure
33.20% chose this answer.

The correct answer, as we’ve noted, is “E” and less than 5% of respondents knew it. More than a third (choices “B” and “D”) thought the tax law changes would be advantageous for homeowners.

The full report is available at the LendEDU website and includes additional information on home equity loans and home equity lines of credit (HELOCs).