The new federal tax code eliminated an interest cost deduction that helped to make home equity a popular source for borrowing.
But the loss of the deduction for the interest paid on a home equity loan, or on the active portion under a line of credit, isn’t expected to reduce the lending volume, according to Rhode Island-based lenders.
That’s because the home equity loan remains a lower-cost alternative to other kinds of loans, such as personal loans. And it’s far easier to access than a refinancing of a first mortgage, bankers say.
“If someone has a need for a home-improvement project, the home equity loan is still the best way to do it, in our opinion,” said Kevin Roche, vice president for residential mortgage origination for Home Loan Investment Bank.
“Even though you don’t get the tax advantage, it’s still the cheapest way to borrow money,” he said.
The reduced interest rate on the home equity loan, compared to other loans, is made possible because it’s secured by the real estate. At Home Loan Investment Bank, the current interest rates for home equity loans range from 4 percent to 7 percent, depending on individual credit and loan criteria, he said.
That compares to an interest rate of 10 percent to 21 percent for unsecured or personal loans.
The Warwick-based bank completes about 300 home equity loans a month, Roche said. The new tax code is not expected to impact that.
One of the reasons why people still tap home equity is because they have more of it.
Appreciation in home values across Rhode Island over the past several years has helped homeowners, who can access that equity for home improvements. For many consumers, this may be their only real source, if they don’t have sufficient savings in cash.
In the scheme of things, the lack of an interest-rate deduction won’t stop that, he said.
“People are not going to [stop doing] it anymore,” Roche said. “Market values have gone up another 20 percent this year. They have more value in the homes. When people want to do improvements, whether it’s tax-deductible or not, it’s not going to stop them from doing a home equity loan.”
The loss of the federal tax deduction for home equity interest is one of the lesser-known and understood aspects of the new tax code, according to a recent survey, published by the website LendEDU.
In a survey of 1,000 people, the personal-finance website found that almost 20 percent of respondents weren’t aware the new tax law would affect the interest cost deduction on home equity loans.
Only 4 percent understood that the tax plan would be disadvantageous to people with a home equity loan.
The revisions, which were signed into law by President Donald Trump in December, take effect with the 2018 tax year but will retroactively apply to all active loans. So, the deduction can be taken for the home equity interest for the 2017 tax year, but not for this year’s activity.
When the law was approved, and covered extensively by financial media, Steven Parente, senior vice president and director of retail banking for Bank Rhode Island, said customers did call to inquire about the changes.
But at this point, the bank does not expect an impact on its volume in home equity loans.
BankRI has about $330 million in consumer loans that are outstanding, he said, and about $150 million or so of that is in home equity loans, including through lines of credit.
Nationally, home equity volume in loans has decreased annually since 2009, when the Great Recession ended, according to figures published by the Federal Reserve Bank of St. Louis.
But that decrease is most likely due to elimination of home equity debt when people refinance first mortgages at lower interest rates, according to Parente.
BankRI has seen an increase in the outstanding balances on home equity loans over the past three years, by about 15 to 20 percent, he said.
‘[A home equity loan] is still the cheapest way to borrow money.’
KEVIN ROCHE, Home Loan Investment Bank vice president for residential mortgage origination
People have taken advantage of lowered interest rates to refinance and repay their debts or wrap them into the new loan.
“People are back at work and feeling good about the economy again,” Parente said, “and were willing to start investing in their homes. After a recession, everyone kind of sits on the sidelines for a while and waits to see what’s going to happen.”
Have the banks loosened lending standards? Parente said the relatively recent increase in home equity activity isn’t the result of that for BankRI, but rather more people wanting to access home equity that has appreciated in the past few years.
The recession resulted in new regulations imposed on lenders. But BankRI always had standards that didn’t allow products such as interest-only loans, Parente said.
“We never did subprime loans, or interest-only loans. We didn’t need to change our lending policy pre- or post-recession.”
Home equity loans remain advantageous, despite the loss of the tax deduction, because the interest rate is low compared to other products, and it’s relatively easy to access, Parente said.
“We don’t anticipate we’ll see a reduction [in consumer interest],” he said. “When people need access to money, especially when they’re doing home improvements or they’re funding education, or even consolidating debt … it is still the best option they have.”
