Can You Deduct Interest on a Home Equity Loan Used to Remodel Your Home?

In short, yes.

Debt secured by a first or second home and used to improve the place has always been considered acquisition indebtedness, so the new law’s crackdown on home equity loans doesn’t apply. After 2017, you can no longer deduct interest on home equity debt used for other purposes, such as to buy a car, pay off credit card debt, or pay college tuition. Remember when we changed the Texas Constitution to allow borrowing on the equity in your farm, ranch, or home for purposes other than home improvements? It was the early 1990s. Well, you can still borrow on your equity for other purposes, you just can’t deduct the interest.

There is also a new limit on eligible acquisition mortgage debt. The new law limits the deductibility of interest on acquisition indebtedness to $750,000 for tax years after December 31, 2017. The new law allows homeowners with existing mortgages to continue to deduct interest on a total of $1 million of debt for a first and second home, but for new buyers, the $1 million limit fell to $750,000 for a first and second home.

When it comes to refinancing your mortgage, homeowners can refinance mortgage debt up to $1 million that existed on December 14, 2017, and still deduct the interest. But the new loan cannot exceed the amount of the mortgage being refinanced, unless used to improve your home.

Example: If Joe has a $1 million mortgage he has paid down to $800,000, then he can refinance up to $800,000 of debt and continue to deduct interest on it. If he refinances for $900,000 and uses the $100,000 of cash to upgrade the home, then he could deduct the interest on the $900,000. But if he uses the $100,000 for other purposes, such as paying off credit card debt, then he couldn’t deduct interest on any of the $900,000 refinancing. I hope this helps.

That is all for today. I look forward to visiting with you next week.  In the meantime, don’t hesitate to reach out with questions.

Home Equity Loans and Proposition 2

A proposed amendment to the Constitution of the State of Texas that would loosen restrictions on home equity borrowing comes to a vote on Tuesday, November 7. Known as Proposition 2, this amendment should hold serious interest for homeowners. Below, I outline the history of home equity loans in Texas and analyze this new proposition.

Home Equity Loan and Line of Credit

In the early 1990s, Texans amended the state constitution to allow home equity lines of credit. Prior to the amendment, Texans could only borrow on the equity in their home to finance home improvements. A home equity loan/LOC includes any indebtedness that is secured by a home if the proceeds were not used to purchase, construct, or substantially improve a home. Under the tax law rules, a taxpayer can deduct interest on up to $100,000 of home equity indebtedness that is secured by the taxpayer’s main home or one other home. The proceeds of the loan may be used for any purpose, including the payment of a child’s college expenses, paying off credit cards, or paying for a new car.  

Proposition 2 

On November 7, 2017, voters will again have the chance to amend the Texas constitution regarding home equity loans. I have included the ballot wording and some explanatory comments.  

The proposition reads as follows:

“The constitutional amendment to establish a lower amount for expenses that can be charged to a borrower and removing certain financing expense limitations for a home equity loan, establishing certain authorized lenders to make a home equity loan, changing certain options for the refinancing of home equity loans, changing the threshold for an advance of a home equity line of credit, and allowing home equity loans on agricultural homesteads.”

After talking to my mortgage banker (, I can tell you that this amendment will help reduce your borrowing costs by removing some of the many fees that you pay when you borrow on your home and limiting some of the fees that lenders charge for credit checks, loan applications, and others, as well as making it easier to get a home equity loan. It will also expand the types of agricultural properties that can borrow on their equity.

This amendment will be effective on January 1, 2018, if it is approved by the voters. It takes a 2/3 majority of the Texas House and Senate to get a proposition on the ballot. Then, it is submitted for approval to the qualified voters of the state. A proposed amendment becomes a part of the constitution if a majority of the votes cast in an election on the proposition are cast in its favor.

Now, it is up to you.