USING YOUR HOME TO PAY FOR IMPROVEMENTS
By Lyn Dippel
When I was young, I was taught to avoid debt and pay off my loans as soon as possible. While this advice is true in many cases, there are times when debt can make good financial sense. Home equity loans are a perfect example.
Home equity loans can be a great way to finance a home improvement project – like updating the interior of an aging home – that will improve the resale value. Certain projects, such as a kitchen remodel or adding a bedroom, are significantly more likely to recoup their cost than, say, adding a pool.
Home equity loans allow you to keep your savings and investments in place, to continue earning money for you. If the rate you earn on your investment savings is higher than the interest you would pay on a home equity loan, it makes sense to finance the expense and pocket the difference.
In addition, home equity loans can be a great way to fund auto purchases because unlike car loans, the interest in most cases is tax deductible. They can also be a good option for funding tuition costs since the rates are often far lower than traditional student loans.
You can leverage the equity in your home in two ways, by taking out a home equity loan or establishing a line of credit. A home equity loan resembles a traditional mortgage. You borrow a lump sum and repay with equal monthly payments over a fixed term, usually up to 15 years. A home equity line of credit (HELOC) on the other hand, provides access to funds up to a certain credit limit that you can draw on anytime. HELOCs work especially well with remodeling projects as contractors are paid over time, so drawing money as those payments are due saves interest on the loan. In any case, Interest on either type can usually be deducted on your income tax returns. The higher your tax bracket, the more valuable this deduction is.
No two situations are alike and factors such as closing costs, the loan term and rate, the type of project planned and your tax status will all be factors. Also keep in mind that although debt financing can make sense in some situations, it is never a good idea to use home equity to fund a project that would otherwise be outside your means.
For information see the government sponsored websites: http://files. consumerfinance.gov/f/201204_ CFPB_HELOC-brochure.pdf or https:// www.consumer.ftc.gov/articles/0227- home-equity-loans-and-credit-lines
To learn more about the value added by various remodeling projects, see http://www.remodeling. hw.net/cost-vs-value/2014/. For current interest rates see: http://www.bankrate.com/ home-equity.aspx. *
Lyn Dippel, JD, CFP®, President of FAI Wealth Management, provides financial planning and investment management for transitions such as retirement, career changes, sale of a business, relocation and inheritance. * http://investfai.com
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