cash or heloc

[ripper1]

Hello All. It's been awhile since I have logged on. Thoroughly enjoying my early retirement. Anyway I have a question for the community. I need to do some home improvement. I have a HELOC that I have used exclusively for college tuition for my children. So I am getting the student loan interest deduction. House is worth 280,000 and HELOC is 65,000 with 130,000 left over. I have 40,000 in cash sitting in an online bank account earning a little over 1%. My pension more than covers our living expenses. The home improvement is necessary in nature and may cost me 20,000. Should I use the cash or the HELOC? The rate on the HELOC is 2.25%? Sincerely, Jack Z

 

[Animorph]

You may be able to deduct the interest on the home improvement portion of the HELOC, which should help. However, if all that does is let you hold cash at 1% it's not benefitting you any. I'd use the cash.

 

[ziggy29]

Both are attractive options: using cash only earning 1% or borrowing at 2.25%. I'd be inclined to use the cash, but there's no real bad option here provided your cash flow can easily wipe out the higher HELOC payments.

 

[ripper1]

Well, I am still quite new to this. Can somebody please tell me how to start a new thread?

 

[REWahoo]

Well, I am still quite new to this. Can somebody please tell me how to start a new thread?

Click on "Forums" at the upper left of the page
Click on the appropriate forum
Click on the "New Thread" button at the upper left of the page

 

[MasterBlaster]

House is worth 280,000 and HELOC is 65,000 with 130,000 left over.

I don't quite understand what you posted. My comment though is that at most only $100k (total) is ever tax deductable on a HELOC.

regarding the cash or the HELOC. It would cost you less in interest payments (even after the tax break) to use your cash. Do you need that cash available for anything ?

 

[ripper1]

ripper1

Thank you for that REWahoo. Thank you also, Blaster, I think I will use the cash.

 

[jayc]

I would get 4 10k CDs at Penfed (or other local credit union) for 3% and borrow at 2.25%. Net 0.75% positive on the money. You can cash out a CD if the HELOC gets out of control. It would have to go over 5.25% before you are borrowing at net 2.25%.

 

[Urchina]

I would get 4 10k CDs at Penfed (or other local credit union) for 3% and borrow at 2.25%. Net 0.75% positive on the money. You can cash out a CD if the HELOC gets out of control. It would have to go over 5.25% before you are borrowing at net 2.25%.

Just checked the PenFed website and the only certificate I saw was earning 2.25% (3 year money market cert). This makes the borrowing a wash.

 

[jayc]

Just checked the PenFed website and the only certificate I saw was earning 2.25% (3 year money market cert). This makes the borrowing a wash.

The 5 yr is 3%, the 7 yr is 3.75% at Penfed. My credit union is paying 3% for 4 yr. Getting CDs is a game of inches. Going from 5 yr to 7 yr is a 25% increase in return and if you have a ladder liguidity is not a problem.

 

[SunsetSail]

My comment though is that at most only $100k (total) is ever tax deductable on a HELOC. ?

This statement isn't accurate. Interest on loans up to $1,000,000 for acquisition indebtedness is tax deductible. Interest on loans for an additional $100,000 in home equity indebtedness are also tax deductible.

If someone purchased a home for $500,000 and had a first deed trust of $300,000 and simultaneously took out a second deed trust in the form of a home equity loan of $150,000 to acquire the property, interest on the entire $450,000 is tax deductible. There would still be $100,000 of deductible loans available for any purpose. There are several documentation hurdles to be overcome but it is possible.

It's confusing because the Internal Revenue Code actually references the term 'home equity loan', but what they really mean is non-acquisition indebtedness.

I know this is narrow and a bit nit picky, but I'm a tax guy so I needed to post.

 

[MasterBlaster]

SunsetSail:

we are splitting hairs here, but in general 2nd trust deeds used to purchase a house are different than HELOC loans.

The OP was not inquiring about what you posted. His scenario of borrowing money post-facto won't ever be deductible beyond $100k.