@MzAdventure wrote:
Thanks for the reply. Are equity lines tax deductible? I was told by a friend they are not and that they often have a variable interest rate. How would I go about talking to someone to find out. I don't do well with high pressure sales tactics and would like to be as armed with information as possible before I start. Which is better an equity line or eqiuty loan and what are the primary differences? Again thanks for any reply, I don't mean to sound naive, but I've read through many of The post and am as confused as ever. Just trying to figure it out so I don't make a monumental mistake
The interest on HELOCs will be tax deductible since you are obtaining the loan for the purposes of improving the property and because the amount you intend to borrow does not exceed the market value of the home. HELOCs that are taken out for paying college expenses, buying a car, or consolidating debt (i.e. not related to the home itself) are subject to limits on the amount that can be deducted. But that's not an issue for you.
HELOCs do have a variable interest rate that is tied to the prime rate (which is based on the Federal Funds rate). Currently, the prime rate is essentially at the lowest rate possible, because the Federal Funds rate is currently just 0.25%. In general, HELOC rates are lower than the fixed-interest home equity loans, but theory could rise above the rate of fixed-income loans that are currently available. That is, you might be able to get a home equity loan with a 6% interest rate, whereas a HELOC's interest rate could be nearly 2 percentage points lower. As the economy recovers, however, the Fed will start raising the FF rate and thus the HELOC's interest rate will go up.
At recent Fed meetings, they have indicated that they intend to keep the FF rate at low levels until the middle of 2014, but that could change if the economy makes a big turnaround.
If you want the security of a fixed interest rate, then the home equity loan would the choice for you. You will pay more interest over the near term, but your payments will never change. If you would prefer to have a lower interest rate at the outset and are willing to tolerate the risk of a rising interest rate, then a HELOC would be the better choice. You will need to make sure you have the discipline to pay down your HELOC debt, because many HELOCs allow you to pay only interest for the first several years of the loan. If you do this, then you could find yourself with the same amount of principal debt, a higher interest rate, and shorter period over which to pay off the loan in its entirety.
Starting Score: 627 EQ, 621 TU - 11/15/08
