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To HELOC or not to HELOC
Question: Hi Chris - my wife and I are considering taking out a small home equity loan or line of credit for a home project ($6-7K). We have plenty of cash reserves to pay for the project outright, but have heard it may make sense to do the HEL/HELOC because we can write off the interest on our taxes. Considering the HELOC would be around 5% + $250 for the appraisal/closing costs, is it even worth the trouble of filling out the application? Thanks, Kelly, St. Paul, MN
Answer: I'd go with cash. The interest you can write off on your taxes won't amount to much.And all the interest deduction means is you slightly reduce the overall cost of the loan. You still have to pay interest and the fee. It's far cheaper to tap your savings and pay cash.
One reason to borrow in circumstances like yours is if using OPM--Other People's Money--adds to your financial flexibility. Unless you have a good reason for maintaining keeping your financial options open at the moment I would pay cash and be done with it.
Another reason to pay cash if possible is just not to have a debt in the way. This one would be a mortgage on your property. Consider what happens if some horrible and expensive health problem occurs, and meanwhile, an unexpected job loss happens. Suddenly, adequate finances can become depleted quickly. What suffers, health, or loan payments? The bank may soon own your house, all for the sake of you using their money for a small loan when you had cash available.
Interest write downs via tax deductions are not all they are cracked up to be anyway. The interest still increases the overall cost of the money. If I have the cash, I only borrow if the interest I pay (considering a tax deduction if any) is less than the money I would make on a safe investment if I used the money that way. That is certainly not true in the current climate.
