Tax-Advantaged Cash Extractions

Smart Ways to Borrow in

Today’s Interest Rate Environment

Now may be a great time to take advantage of lowinterest debt consolidation opportunities. You can do so while reaping potential tax benefits. One of the most attractive options available to many home owners is the home equity line of credit (HELOC).

This year has seen a surge in HELOCs due to rising house values, low interest rates, and looser lending practices. Average loan amounts for HELOCs are 10% larger than a year ago, according to TD Bank.

Typically, banks will require at least 20% equity on a HELOC. But some are now lending on as little as 10%. Loan-to-price ratios on conventional mortgages are on the upswing. Though not quite as much as precrisis 2007 levels. Lenders are more willing to loan to home buyers and home owners.

How Low a Rate Can You Expect to Get?

After experiencing upward pressure in 2013, interest rates for residential loans as well as home equity lines of credit (HELOCs) have been declining slightly. The average rate on a home equity line of credit was 4.86% by mid August (source: Bankrate. com). This compares to 4.29% for a 30-year fixed mortgage. A fixed-rate home equity loan will cost you a much higher interest rate than a HELOC.

Unlike a home equity loan, a home equity line of credit carries a variable rate of interest. So your making longterm investments with funds made available through a HELOC entails the risk that rates might not remain relatively low. One nice thing about HELOCs is banks typically let you pay them down and draw the money back out at will. So it is smart to pay down a HELOC with funds you are not putting to better use.

The interest paid through the HELOC is generally taxdeductible. So the effective interest rate may be even less than quoted. Of course this is all based on your tax bracket. Do watch out, though. HELOC fees and hidden charges that could make one lender’s “lower” advertised rate higher than another lender’s.

If you pay off higher-interest credit card or other debt through a HELOC, you could save hundreds or even thousands of dollars. Pocket those interest charges – and convert those interest expenses into tax write-offs. If you use a home equity line of credit for something other than home improvement, you can still deduct interest on the
loan. All the way to a maximum principal of $100,000.

Other Routes to Tax-Deductible Financing

It depends on when your home was purchased. And the length of time that you anticipate staying in the home. Then refinancing could be another viable way to extract cash from your home. (And boost your tax deductions.) Beware of closing costs. Lots of people with hands in your pocket at closing time. The government has everybody in the act and the paperwork is massive. The key is to read the fine print. Make sure that the lender is not charging excessive points. Ask hard questions about miscellaneous fees during the refinancing process.

Determine the total amount that the fees will cost. Compare them to the annual savings you could get through a reduced interest rate. This analysis will lead you to a break-even point. From there you will need to expand upon your cost-savings math. It should also include how long you will live in your home. Put it all together and you get a real benefit from refinancing.

There are other ways to convert interest costs into tax deductions. This includes deductible investment borrowing. (Look into a margin account at a brokerage firm.) Or seek business credit. If you own a business, you might consider minimizing your personal, non-deductible borrowing (credit cards, car loans, etc.). And shift any necessary interest expenses to your business such as through low-rate business credit cards and business loans. As long as the credit is used to finance legitimate business expenses, the associated interest may be tax deductible.