What’s up with mortgage rates and home loans? Jeff Lazerson of Mortgage Grader in Laguna Niguel gives us his take.
If you have an existing home equity line-of-credit (HELOC) or second mortgage, do you have to fold that into a new first mortgage for it to remain tax deductible under the new tax laws?
HELOC deductibility depends on whether it was “home equity indebtedness” or “acquisition indebtedness.” Acquisition indebtedness — mortgage debt used to acquire, build or substantially improve the residence — will be deductible, according to Michael Kitces, partner and director of Wealth Management at Pinnacle Advisory Group.
“Money used for any other purpose is home equity indebtedness,” Kitces said, and is no longer deductible, without any grandfathering.
If your existing HELOC (acquired before Dec. 15) was used for both acquisition and indebtedness, then you will have to split it going forward.
“It’s the old tracer rule,” said Warren Hennagin, CPA and partner at Marcum LLP. “If you used $50,000 for home improvement and another $50,000 for debt consolidation, only the $50,000 home improvement interest will be deductible.”
Any new mortgage debt acquired after Dec. 15 caps out at $750,000. This may be split between a first mortgage and a HELOC or fixed-rate second, according to Hennagin. Any existing total acquisition mortgage debt is deductible up to $1 million.
And, what about the deductibility of a so-called piggy-back purchase money mortgage (80 percent first mortgage, 10 percent second mortgage and 10 percent down payment) to avoid paying mortgage insurance?
That piggy-back second will be deductible so long as you stay within your total mortgage interest deduction cap of $750,000.
If you do want to roll an existing second lien into a new first mortgage, there is some math that you’ll need to do:
- Shop around for pricing and service levels and make sure you qualify with any potential suitors. Compare the new interest rate…