A home-equity line of credit, or HELOC, can be used to cover all manner of liquidity needs, from property improvements and tuition to emergency expenses and even debt consolidation. But because of the Tax Cuts and Jobs Act, homeowners can now deduct the interest on such loans only if the proceeds are used to “buy, build or substantially improve” a qualified residence.
These newfound limitations may prompt homeowners to consider other financing methods when needing quick access to cash. “Home-equity lines of credit may still make sense for many borrowers,” says Tony Sachs, vice president of lending products and strategy at Charles Schwab Bank, “but today it’s wiser than ever to consider all the options before making a decision.”
One such alternative is a Pledged Asset Line (PAL), in which investors borrow against the value of their nonretirement assets rather than liquidating them.
“Establishing a PAL can be a great way to build in some flexibility for expected or unexpected expenses,” says Tony, who notes that such funds can be borrowed, repaid and re-borrowed as needed. While the interest paid on a PAL isn’t tax-deductible, rates may be more competitive than those for home-equity lines of credit.
Note, however, that pledged asset lending involves a high degree of risk:
- If the value of your collateral declines, you may need to deposit more cash or securities to avoid a default.
- Your pledged securities could be sold without your consent, which could result in tax consequences.
- And the proceeds must be used for a lawful purpose, may not be used to purchase securities or pay down margin loans, and may not be deposited into a Schwab brokerage account.
Another option is a cash-out refinance, in which homeowners borrow enough against the equity in their home to cover the existing mortgage, plus additional funds. Though cash-outs tend to command higher interest rates than a more conventional refinance, the interest on the loan may be tax-deductible—depending on its purpose—up to certain limits based on the total size of the loan. Be sure to consult with a tax professional or financial advisor as you weigh your options.
What You Can Do Next
Looking for alternatives to a home-equity loan? Learn about Schwab Bank’s Pledged Asset Line®.