Can anyone talk to me about home equity loans? We have two houses and one of them is paid in full. His ex wife currently rents it for about $500 less than other houses like it would rent for. It was mentioned to me that we should consider taking a loan out on the house that is paid off for tax consideration.
I have been a stay at home mom for eight months now and money is really tight. We eliminated most of our debate before I had the baby, but we keep having unexpected expenses. For example, my husband needed to get an emergency crown on his tooth.
Because of this we now have about $4000 in debt, not including mortgage and auto loans. We will be able to eliminate almost all of that debt in March when my husband gets his bonus. Additionally, one of our cars will be completely paid in full at that time as well.
I'm a teacher and if I was able to find a job at this time it child care would cost more than my pay. I would really like to start a business and having a little extra cash would also help in this situation.
We opened up a HELOC on our house about 2 monts ago. Our credit union had no costs if you withdraw $10k immediately. Since that house is paid off, you could probably get your rate at Prime(currently 3.25). We can pay it off or have any amount drawn on it and it will stay open for 20 years. I would check into local banks or credit unions near you.
However $4k isn't a lot of debt. If you are struggling why is his ex wife renting at$500 below market value? Can you increase her rent or rent to someone else? Or sell the house?
You're considering taking out a home equity loan against a house that is paid off in order to pay off other debt?
That is a very bad idea. Please do not even consider it.
$4,000 is not an incredible amount of debt. It sounds like you have an income/budgeting issue more than anything. Consider posting your budget if you'd like some feedback.
(As an aside, about the tax consideration part, here's how that works. Say you take out a home equity loan and you pay $2,000 year in interest on it and your marginal tax rate is 25%. You'd be paying $2,000 in interest to "save" $500 on your taxes. Not worth it.)
With a rental property, you need to pay income taxes on the income you receive from rent. You put all of this on your schedule E. Against that income, you can deduct your rental expenses. A HEL on a rental property will make the income from the rental property smaller and gets added to the property taxes, depreciation, etc.
So it is a little different as you won't be able to use the mortgage interest on the HEL to make your w2 (wage earned income) smaller. You will just be making your rental income smaller. This could be significant or not.
And not to mention the fact that there are actually really bad tax implications for renting a property to someone for less than the market rate, but I won't go there with this. Why don't you make ex-wife pay more in rent?
We are budgeted to the max. That is not the issue. The biggest thing is the unexpected expenses like needing a new crown.
My thinking is that getting a small home equity loan at 3.25% or even higher is better than putting our expenses on a credit card at 18% interest. My other thought is that it would really help with getting my business going faster thus enabling me to contribute to the household income sooner.
As far as his ex wife is concerned that is a whole other bag of worms. Part of it was to help her out with money. She was thinking of moving to another city and wanted to take my step daughters with her, cutting her expenses. Also, the house is about a mile away and it makes it really easy handling kid stuff.
We are budgeted to the max. That is not the issue. The biggest thing is the unexpected expenses like needing a new crown.
My thinking is that getting a small home equity loan at 3.25% or even higher is better than putting our expenses on a credit card at 18% interest. My other thought is that it would really help with getting my business going faster thus enabling me to contribute to the household income sooner.
As far as his ex wife is concerned that is a whole other bag of worms. Part of it was to help her out with money. She was thinking of moving to another city and wanted to take my step daughters with her, cutting her expenses. Also, the house is about a mile away and it makes it really easy handling kid stuff.
Your budget doesn't allow for expenses, so it really is an issue. A crown may be an unexpected expense, but your budget should allow for a certain amount of unexpected expenses. You should have an e-fund in place for things that are over and above that.
Things like crowns and whatever other "unexpected expenses" you are referring to are part of life, and they will never go away. Work that into your budget now.
When you take our a HELOC to pay on other debt, you are turning unsecured debt into secured debt. That is not generally a good path to take. What are you going to do with the HELOC is maxed and you still have these everyday unexpected expenses?
Do dentists have payment plans? I would try to work it out with them before automatically putting it on a credit card. Also, if you don't have an efund for unexpected emergencies, then you need to be saving more.
oso, PLEASE don't do this! Some new businesses take off, yes, but unfortunately many fail. If you need a loan to start a business, please don't tie it to a home that you or your family is living in.
If you are already budgeted to the max, and are struggling to pay off $4,000 or manage unexpected expenses, that is a red flag that you might not have the cushion necessary to extend yourself by starting a business.
This is a common Suze Orman call - someone used a home equity loan to pay for something that has evaporated (investments, businesses, etc.)