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Taxes and a home equity loan

Chris Farrell Mar 28, 2012

Question: Hello. I’m 50 and single. I have a 15-year mortgage at 3.5 percent. My income is more than $80,000. I have a Roth and I am maximizing my company’s 403(b) account. I have no credit card debt — no debt in general except the mortgage, so I don’t have a lot of write-offs. Does it make sense to get an equity loan and finish my basement so I can get a bigger write-off on taxes while investing in my home, or should I continue to just sock money away because it is better to not have debt? Thanks. Lisa, Salt Lake City, UT

Answer: Tax season is here, so we get variations of your question. It doesn’t make sense for you to take out an equity loan for the tax write-off. The debt will end up costing you much more than you will save on the tax bill. I’d continue to putting money away in savings.  

There is an old adage in finance, a sound insight for a business investing in equipment and a homeowner thinking about a remodeling project: Look at the economics of the project first. If the economics are good, then take taxes into account. Uncle Sam usually lowers the overall cost of an investment.  

So, if you want to finish your basement for lifestyle reasons (now or at some point later on), you could pay for the remodeling project with a mix of savings and home equity loan. Uncle Sam will reduce the cost of the loan a bit. Even a small discount on the overall renovation price tag is nice.  

I do expect we’ll see a pick-up in remodeling projects in 2012, by the way — assuming the economy continues to improve. Interest rates are low and homeowners may decide to move up projects to take advantage of today’s low rates

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