Home equity loan vs. HELOC

[SecondAttempt]

I've got a few home improvemnet projects I intend to do over the first few years of retirement starting next year. Funding these is built into my retirement plan so I am not in a position where I need to borrow. But I am looking at options. Rates are low right now and it may make sense to borrow rather than spend cash.

My question for the experts really focuses on taxes. My understanding is that interest from either a HELOC or home equity loan is deductible if used for home improvement. So if I do a HELOC I basically get a checkbook that I can use to pay contractors or buy materials as I go, fairly simple to document using for home improvement.

But if I take out an equity loan I simply get the proceeds at the start. How do I document the use, possibly years later, for tax purposes?

The amount I am considering is modest, around $50,000 so probably not something that would catch anyone's attention. But I do try to be honest when it comes to taxes.

 

[old medic]

Not an expert by know means, but we were planning on a HELOC for our major house restoration. Unfortunately it didn't work out.
With the HELOC your only paying interest on money you have pulled out. With the loan your paying interest on it all right from the start. And depending on your taxes, if your filing with just the standard deduction, think the interest paid wont apply.

We have gone to using store cards with offers of 0% interest and pay them off before any accrual.
Now you may be able to save some $ on taxes depending on improvements giving you a tax credit.

 

[donheff]

If you are planning on doing this after you retire are you going to be itemizing? Almost everybody uses the standard deduction these days so the interest deduction can't be realized. Also, you say rates are low right now but all I see are rates double what they were a year ago.

 

[COcheesehead]

Receipts are going to be your friends, but as others said it’s a moot point for taxes unless you are over the standard deduction which is relatively high and gets higher each year.

 

[OldShooter]

HELOC is more flexible. Assuming interest rates are identical, that's all you need to know.

 

[bloom2708]

Rates are low?

I'd pay for them 1 by 1. If not willing to pay as you go, then delay.

 

[SnowballCamper]

Yeah, rates are not low (relatively). But even at 6.7% the first year interest payments on a $50,000 loan over 15 years are less than $4000, much lower than the standard deduction. No real tax advantage to a HELOC, but if you need to borrow, the flexibility is nice.

 

[COcheesehead]

Yeah, rates are not low (relatively). But even at 6.7% the first year interest payments on a $50,000 loan over 15 years are less than $4000, much lower than the standard deduction. No real tax advantage to a HELOC, but if you need to borrow, the flexibility is nice.

A itemized deduction is an accumulation of a number of expenses though.

 

[Philliefan33]

A itemized deduction is an accumulation of a number of expenses though.

Yes, but the MFJ standard deduction of ~$28,000 or more is a high hurdle. State & local taxes paid (including real estate taxes) is capped at $10K. Add $4000 of mortgage interest and you’re still only halfway there.

You need either a lot of medical expenses, which I don’t wish on anyone, or charitable contributions to make up the difference.

 

[Irishgirlyc58]

Spoiler alert!
Not everyone is married.

 

[COcheesehead]

Yes, but the MFJ standard deduction of ~$28,000 or more is a high hurdle. State & local taxes paid (including real estate taxes) is capped at $10K. Add $4000 of mortgage interest and you’re still only halfway there.

You need either a lot of medical expenses, which I don’t wish on anyone, or charitable contributions to make up the difference.

I understand. I’ve done my own taxes for years, but the response above mine was taking only into account the expense on the HELOC.

 

[rodi]

Whichever route you go, you should get the loan set up before you pull the plug on retirement since you'll have documented income.

That said - I didn't open our HELOC till after I retired, but was able to show monthly transfers from investment/IRA to our checking... plus our rental income and DH's SS income.

We still have our HELOC - but don't use it... Last time we used it was to straddle tax years when DH bought a car and we were pulling money from IRAs to pay for it. (Didn't want to bump to a higher tax bracket with a big taxable withdrawal and were buying the car in December.)

 

[SecondAttempt]

Also, you say rates are low right now but all I see are rates double what they were a year ago.

Rates are low?

Yeah, rates are not low (relatively). But even at 6.7% the first year interest payments on a $50,000 loan over 15 years are less than $4000, much lower than the standard deduction. No real tax advantage to a HELOC, but if you need to borrow, the flexibility is nice.

The rate I would get is 4.1%. Yes, much higher than a year ago but I still consider that low. I refinanced my primary mortgage very close to the bottom in rates. I got 2.75% for 30 years and I am in no hurry to pay that off.

I am not married but likely will be by th eend of 2024 so that is something I did not consider. I itemize now but you are all right, if I'm married I'd take the standard deduction so the tax considerations are moot.

 

[jazz4cash]

Is 4.1% the HELOC or HEL? HELOC is almost always variable. Look closely at the index, margin, and caps. As for receipts, you won’t need them to file but I’d keep them (or statements, notebook, etc) in case of audit.

 

[SecondAttempt]

Is 4.1% the HELOC or HEL? HELOC is almost always variable. Look closely at the index, margin, and caps. As for receipts, you won’t need them to file but I’d keep them (or statements, notebook, etc) in case of audit.

It's for HELOC. You are correct it is variable but is fixed for 5 years. The 4.1% also includes a discount for the kind of checcking account I have and for using autopay.

 

[jazz4cash]

4.1 fixed for 5yrs is good.