Should my parents HELOC their house?

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25w100k+_IHB

25w100k+_IHB

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My dad always complains about paying too much taxes. The problem is, his mortgage is so piddly compared to his income. He has a 400k mortgage, and is sitting on I'd guess a million in equity.



So is there a reason he shouldn't take out 400k, put it in mutual funds, try and make a conservative 6-7%, paying 6-7%, but able to write off the full amount (he's higher then the 30% bracket), then after 10 years or so pay 15% long term capital gains on what he made?



I think i'm probably not thinking a lot of this through...so why isn't this done more?



(disclaimer: I don't know much about finances, other then save more then you make, etc...)
 
Where does he live?



BUT knee-jerk reaction.... No. Or rather I should say.... NNNNNNNNOOOOOoooooooo!



if his house falls then all of a sudden that money is needed to pay back... with interest. Joy.



If he has legit reasons to use the money (business opportunity), look at the cost of opportunity and just what the

risks are. MANY people have done this and lost their butt. I've done it a few times, but i've been vary careful to

pay back everything withing 3-5 years (usually 2-3 years). Plus his business plan must be better 10-12% for a

cap rate. (again, just a rule of thumb unless he's walking in with TONS of capital to gut out any ups and downs....)



Good luck

-bix
 
i dont see a need to make more money here, in terms of your dad and you, if you guys are bored then,

why not take just 50k out first? try investing it or whatever you want to do.

if it goes your way, you can decide then if you want to continue to make bigger investments.



but like others have said before, HELOCing is addictive, so watch out!



[quote author="25w100k+" date=1213848183]My dad always complains about paying too much taxes. The problem is, his mortgage is so piddly compared to his income. He has a 400k mortgage, and is sitting on I'd guess a million in equity.



So is there a reason he shouldn't take out 400k, put it in mutual funds, try and make a conservative 6-7%, paying 6-7%, but able to write off the full amount (he's higher then the 30% bracket), then after 10 years or so pay 15% long term capital gains on what he made?



I think i'm probably not thinking a lot of this through...so why isn't this done more?



(disclaimer: I don't know much about finances, other then save more then you make, etc...)</blockquote>
 
[quote author="25w100k+" date=1213848183]My dad always complains about paying too much taxes. The problem is, his mortgage is so piddly compared to his income. He has a 400k mortgage, and is sitting on I'd guess a million in equity.



So is there a reason he shouldn't take out 400k, put it in mutual funds, try and make a conservative 6-7%, paying 6-7%, but able to write off the full amount (he's higher then the 30% bracket), then after 10 years or so pay 15% long term capital gains on what he made?



I think i'm probably not thinking a lot of this through...so why isn't this done more?



(disclaimer: I don't know much about finances, other then save more then you make, etc...)</blockquote>


awgee would likely be the best to confirm, but I believe you may only deduct interest on up to $100K of home equity debt. Why pay 6-7% net after interest expenset to make less than 6-7% net on investment return?



That being said, I believe in asset class diversification. If I was your dad, and had the vast majority of my net worth tied up in my home and I was unwilling to move, I might consider drawing $100K of equity debt to invest in another asset class. I did this during a few years on a small scale, i.e. funded a few years of my kids education IRAs with HELOC proceeds. I didn't want to miss the chance to contribute to the IRA.



I also bought my SUV cash with HELOC dollars... The deductibility of the HELOC interest makes it much cheaper than an auto loan.
 
C?mon man, what kind of silly question is that.

Absolutely, no question he should heloc it and take the money while the getting?s good.



Have him break you off 1/3 (300K) of the $1M so you can get something ?decent? in Northpark along with a new 6-series rather than those lame condos and 3-series you keep posting about.

This is the Finals my man, time to up your game.



If that doesn?t work, convince him to sell to me and I?ll kick you a sweet spiff.

Why should the agent get it and not you?

Win-Win!
 
[quote author="ipoplaya" date=1213849679]I also bought my SUV cash with HELOC dollars... The deductibility of the HELOC interest makes it much cheaper than an auto loan.</blockquote>


IIRC, you're only supposed to deduct the HELOC interest if the money was used for the house.
 
[quote author="25w100k+" date=1213848183]My dad always complains about paying too much taxes. The problem is, his mortgage is so piddly compared to his income. He has a 400k mortgage, and is sitting on I'd guess a million in equity.



So is there a reason he shouldn't take out 400k, put it in mutual funds, try and make a conservative 6-7%, paying 6-7%, but able to write off the full amount (he's higher then the 30% bracket), then after 10 years or so pay 15% long term capital gains on what he made?



I think i'm probably not thinking a lot of this through...so why isn't this done more?



(disclaimer: I don't know much about finances, other then save more then you make, etc...)</blockquote>


The answer to whether or not the interest on the HELOC is deductible is very, no, extremely complicated and I am unsure if I can explain here, but here goes.


The maximum that <strong>MAY</strong> be deductible on the HELOC is the interest on $100,000, but with exceptions and qualifications.


The total home equity debt is limited to the smaller of: $100,000 ($50,000 if married filing separately), or the home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt.


Soo-o-o-o, you need to know what the appraised value of your parents home is and what is the current balance on their mortgage in order to correctly calculate how much interest is deductible.


Now my opinion: Do not borrow on your home in order to invest in Mutual funds, stocks, bonds, or anything else. If your parents like their home, they should just live in it. A home is not an ATM. I have some wealthy clients and all of them own their homes outright, with no mortgage. Instead of being smart, copy the wealthy. Do not pay $100 in interest in order to save $30 in taxes. Both of my parents own their own homes with no mortgage.
 
[quote author="EvaLSeraphim" date=1213852314][quote author="ipoplaya" date=1213849679]I also bought my SUV cash with HELOC dollars... The deductibility of the HELOC interest makes it much cheaper than an auto loan.</blockquote>


IIRC, you're only supposed to deduct the HELOC interest if the money was used for the house.</blockquote>


I do not believe that is true Eva. <a href="http://www.bankrate.com/brm/itax/tax_adviser/20040520a1.asp">See this Q&A;.</a> The interest on the first $100K of second mortgage (HELOC) is deductible without limitation with regards to use of the proceeds... There are other limitations, but on that $100K, its not about what you do with the money.
 
[quote author="ipoplaya" date=1213859781][quote author="EvaLSeraphim" date=1213852314][quote author="ipoplaya" date=1213849679]I also bought my SUV cash with HELOC dollars... The deductibility of the HELOC interest makes it much cheaper than an auto loan.</blockquote>


IIRC, you're only supposed to deduct the HELOC interest if the money was used for the house.</blockquote>


I do not believe that is true Eva. <a href="http://www.bankrate.com/brm/itax/tax_adviser/20040520a1.asp">See this Q&A;.</a> The interest on the first $100K of second mortgage (HELOC) is deductible without limitation with regards to use of the proceeds... There are other limitations, but on that $100K, its not about what you do with the money.</blockquote>


Sorry, his answer is correct, but Ipop's answer is incorrect. There are limitations, and the use of funds will influence the deductibility.
 
[quote author="25w100k+" date=1213848183]So is there a reason he shouldn't take out 400k, put it in mutual funds, try and make a conservative 6-7%, paying 6-7%, but able to write off the full amount (he's higher then the 30% bracket), then after 10 years or so pay 15% long term capital gains on what he made?</blockquote>


Look at this on a risk/reward analysis. You take a whole lor of risk for not so much potential gain (3%-5% net of $400k is not that much if he already has $1M in equity).



A different question could be, should I ever pay down my mortgage? In reality, the best move is to spend the least amount of money on a property (0% down), and only pay the interest...or only a portion of the interest (ARM). Put the money you would normally use to pay your mortagage in a fund that earns more money than what you are be paying in interest (stock market). This way you leverage yourself as much as possible. Why people don't do it? Well because that's too much risk to handle. Those who did are losing their homes currently. You might want to do it if you are financially stable, have a safe job and enough money set aside to be able to pay any adverse event. A normal housing market and a normal stock market would probably help too!



[quote author="25w100k+" date=1213848183](disclaimer: I don't know much about finances, other then save more then you make, etc...)</blockquote>


I am not sure how you can save more than you make, but you can spend less money than you make ==> save money!
 
This is something I've been meaning to research.... if we borrowed from a HELOC on a rental property and used the money towards a primary residence, can we deduct the interest? We now have a HELCOC on the primary, but the rate is much higher, so I'm inclined to leave it on the rental property if we can still deduct the interest.
 
[quote author="stepping_up" date=1213861505]This is something I've been meaning to research.... if we borrowed from a HELOC on a rental property and used the money towards a primary residence, can we deduct the interest? We now have a HELCOC on the primary, but the rate is much higher, so I'm inclined to leave it on the rental property if we can still deduct the interest.</blockquote>


If you borrow on a rental property, the interest deduction will go on your Schedule E for the rental property. Generally, you may not deduct interest on any amount greater than the appraised value for a rental. And of course, there are many other limitations on the total deductions for a rental.


If you borrow on your residence, the interest deduction will go on your Schedule A with limitations.


I would guess that no lender will loan you money on a HELOC for a rental. Just a guess.
 
[quote author="Roo" date=1213861370]



A different question could be, should I ever pay down my mortgage? In reality, the best move is to spend the least amount of money on a property (0% down), and only pay the interest...or only a portion of the interest (ARM). Put the money you would normally use to pay your mortagage in a fund that earns more money than what you are be paying in interest (stock market). This way you leverage yourself as much as possible. Why people don't do it? Well because that's too much risk to handle. Those who did are losing their homes currently. You might want to do it if you are financially stable, have a safe job and enough money set aside to be able to pay any adverse event. A normal housing market and a normal stock market would probably help too!



</blockquote>


Good strategy, makes a lot of sense. Thanks Roo.
 
[quote author="awgee" date=1213864638][quote author="stepping_up" date=1213861505]This is something I've been meaning to research.... if we borrowed from a HELOC on a rental property and used the money towards a primary residence, can we deduct the interest? We now have a HELCOC on the primary, but the rate is much higher, so I'm inclined to leave it on the rental property if we can still deduct the interest.</blockquote>


If you borrow on a rental property, the interest deduction will go on your Schedule E for the rental property. Generally, you may not deduct interest on any amount greater than the appraised value for a rental. And of course, there are many other limitations on the total deductions for a rental.


If you borrow on your residence, the interest deduction will go on your Schedule A with limitations.


I would guess that no lender will loan you money on a HELOC for a rental. Just a guess.</blockquote>


They did lend us money on it. We put 20% down on it and it appraised for $120K more than we bought it for. Got a HELOC for even more than our DP. If the interest on this line goes on the schedule E, it's my understanding that the money has to be used for that property.If we can deduct interest up to it's appraised value, then it would be deductible. So, it doesn't matter what we do with the money up to the appraised value?



It's currently at 5%. The HELOC on the home we live in is 6.5%. These are both variable. If I can't deduct the interest on the rental, are we better off paying 1.5% more interest and deducting? Fed rate is 25% and state is 9.3%
 
[quote author="stepping_up" date=1213866846][quote author="awgee" date=1213864638][quote author="stepping_up" date=1213861505]This is something I've been meaning to research.... if we borrowed from a HELOC on a rental property and used the money towards a primary residence, can we deduct the interest? We now have a HELCOC on the primary, but the rate is much higher, so I'm inclined to leave it on the rental property if we can still deduct the interest.</blockquote>


If you borrow on a rental property, the interest deduction will go on your Schedule E for the rental property. Generally, you may not deduct interest on any amount greater than the appraised value for a rental. And of course, there are many other limitations on the total deductions for a rental.


If you borrow on your residence, the interest deduction will go on your Schedule A with limitations.


I would guess that no lender will loan you money on a HELOC for a rental. Just a guess.</blockquote>


They did lend us money on it. We put 20% down on it and it appraised for $120K more than we bought it for. Got a HELOC for even more than our DP. If the interest on this line goes on the schedule E, it's my understanding that the money has to be used for that property.If we can deduct interest up to it's appraised value, then it would be deductible. So, it doesn't matter what we do with the money up to the appraised value?



It's currently at 5%. The HELOC on the home we live in is 6.5%. These are both variable. If I can't deduct the interest on the rental, are we better off paying 1.5% more interest and deducting? Fed rate is 25% and state is 9.3%</blockquote>
Sorry, I did not understand.


If you borrow on the rental property, the amount you may deduct as rental mortgage interest will be the portion of the interest paid on the portion of the loan amount spent on the rental property. If you spend the total loan proceeds on the rental property, all the interest is deductible. If you spend all the loan proceeds on a personal use car, none of the interest is deductible as rental mortgage interest or any other type of interest expense. If you spend all the loan proceeds on investments, the interest is deductible as investment interest, with limitations. Any portion of the loan used on a deductible expense may be deducted as that particular type of interest expense, again within whatever limitations are imposed on that type of interest expense.


Also, there are passive activity loss limitations on rental activities.
 
[quote author="tenmagnet" date=1213849979]C?mon man, what kind of silly question is that.

Absolutely, no question he should heloc it and take the money while the getting?s good.



Have him break you off 1/3 (300K) of the $1M so you can get something ?decent? in Northpark along with a new 6-series rather than those lame condos and 3-series you keep posting about.

This is the Finals my man, time to up your game.



If that doesn?t work, convince him to sell to me and I?ll kick you a sweet spiff.

Why should the agent get it and not you?

Win-Win!</blockquote>


:lol:
 
hahah, yeah the real answer is to have your dad pay off the house early OR sale the place and move into something smaller. Either strat will save him interest & taxes.
 
[quote author="awgee" date=1213859935][quote author="ipoplaya" date=1213859781][quote author="EvaLSeraphim" date=1213852314][quote author="ipoplaya" date=1213849679]I also bought my SUV cash with HELOC dollars... The deductibility of the HELOC interest makes it much cheaper than an auto loan.</blockquote>


IIRC, you're only supposed to deduct the HELOC interest if the money was used for the house.</blockquote>


I do not believe that is true Eva. <a href="http://www.bankrate.com/brm/itax/tax_adviser/20040520a1.asp">See this Q&A;.</a> The interest on the first $100K of second mortgage (HELOC) is deductible without limitation with regards to use of the proceeds... There are other limitations, but on that $100K, its not about what you do with the money.</blockquote>


Sorry, his answer is correct, but Ipop's answer is incorrect. There are limitations, <strong>and the use of funds will influence the deductibility</strong>.</blockquote>


awgee, please enlighten me as to how the use of funds will influence the deductibility of interest on $100K of HELOC debt. <a href="http://www.irs.gov/pub/irs-pdf/p936.pdf">I glanced at Pub 936</a> and can't find anything that would suggest my answer is incorrect. Can you provide section references?
 
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