</font><font color="blue" class="small">( Got a call from our bank asking if we were interested in a home equity line of credit. I have heard of this before, but do not know all the details and need you help. They are offering us prime rate which is 4% with no fees, and .25% below prime if we pay a one time fee of $125. They say as long as we keep the line of credit, we will have no fees to pay. Our plan would be to take our current home equity loan at 7.5% for 15 years, have about 5 years left, pay it off with the home equity line of credit in the next 24 months. My questions are as follows:
Is a home equity line of credit tax deductible for federal taxes?)</font>
The answer, in general, is yes. You must itemize deductions (i.e. use Schedule A). If the interest on your current home equity loan has been deductible, the new loan will probably be deductible. Check on last year's 1040 Schedule A, line 10. If your current home equity loan interest is on that line, your new loan's interest will probably go there also. If Form 1040, line 36 is over $137,000, your deductions may be limited.
</font><font color="blue" class="small">( Why would a bank want us to go for a loan that will pay less interest to them?)</font>
If they can get you to sign up with the $125 fee, they will get a sudden interest payment. This may or may not be beneficial to you depending on your cash flow and budget. Although your monthly payment will be less, you are paying for this up front. Most of the time the bank will include that $125 fee in the loan amount, thereby minimizing any out-of-pocket expenses at closing. Check to make sure there are no other closing costs - I would bet there are. If the current home equity loan is old, you will need at least another appraisal.
Currently you are paying them minimal interest despite the rate. Look at the statements. In the beginning of the loan the first payments will be mostly interest, while the last payment will be all principal. What that means is that you currently aren't paying much in interest at all. If they can get you to refinance - they will be going back to higher interest payments coming to them. Also, the line of credit can probably be for a higher amount, increasing the interest they can charge. One of their worries is that you won't do anything and will continue to have their money without having to pay much in interest. Mostly they are worried you will go to somebody else for the next loan.
</font><font color="blue" class="small">( Do you see a down side to this?? )</font>
If you open this loan you will have a longer period of indebtedness, and will be paying interest again. It will take longer to pay off this loan. The other downsides are that a new loan may encourage you to borrow more and increase your negative monthly cash flow; it increases your debt making it hard to get another loan since it counts against your credit score; and higher/longer mortgage loans put your house at risk if you are unable to make payments.
</font><font color="blue" class="small">( Is this a good deal?)</font>
With the lower percentage of interest, a new loan will have lower monthly payments, decreasing your monthly cash flow. This may be good for you. It may be a good idea if you need more deductions to offset income, thereby decreasing your taxes. It would be especially helpful if these increased deductions cause you to drop into a lower tax bracket. Also a good idea if you want cash for other projects, or to have an emergency source of cash if you need it. If you are paying 4% and your tax bracket is 15%, your effective interest rate is 4% x 85%, or 3.4%. That means, if you can deduct the interest, you can borrow the money from the bank and come out ahead if your investments appreciate more than 3.4% a year. In many areas of the country, real estate is doing that easily. In some areas, that may not be true.
</font><font color="blue" class="small">( , if not, do you have any suggestions?)</font>
There are many variables, depends on you tax status, stability of monthly income and employment, and aversion to debt. There is a satisfaction in paying it off and not having monthly payments,
