CrockPot

I've been playing around with this notion in my head...not necessarily because I plan on doing it, but just because it's a possibility. Please chime in with thoughts and input on whether or not I even have my facts correct.

It is my understanding that if one was able to take out a line of credit/equity on their property, they can deduct interest up to a loan of $100K for tax purposes. Assuming this is correct, and that interest on this type of loan is usually prime or prime + a small percentage, the rate should be around 4.75% give/take. Adjusting for a ~30% income tax bracket, a $100K loan with a 4.75% rate would essentially be 3.325%.

Now let's say I take $100K and immediately dump the vast majority, if not all of it into a guaranteed CD (ING has a 5 year at 4.0%), or any other investment account. As long as my returns are greater than 3.325%, I'm essentially making money without having to put up any of my own cash. This is one benefit, immediate tax breaks are another.

What do you guys think? Any flaws, factors that I've negated?

Zippee

Do not forget that the interest earned on the CD will be taxable as ordinary income or 30% in your case.

chef chris

Prime will move up, your CD rate will not.

CrockPot

^^
true on both...

the taxable interest earned on the CD would most likely cancel out any gains made. but, let me amend the previous scenario by just a bit. it looks as though the prime rate won't be increasing too much, if at all, in the next couple years. since the first few years are when payments towards interest takes on the vast majority versus payments towards principle, it makes sense NOT to keep a line of equity loan (for this scenario) going for too long anyways, since the tax savings will be maximized at the beginning. so, after the CD term is expired, collect on the interest, and repay the balance of the loan.

anyways, this was just something a couple my co-workers and i were talking about during lunch. appreciate the feedback thus far.

chef chris

The problem with a line, especially one that can easily be afforded, is that you normally only pay the interest on that month anyhow(which isn't much). That won't make the kind of tax break you're looking for.

A regular line is usually amortized over a 7 to 10 year period. Means a payment of over a $1000 if you pay principal as well(only roughly $400/month is interest).

Not to mention the fees involved to open the account.

Just figure that Prime/T-bill rates are what banks & credit unions use to determine what they charge for interest(both to lend & to use on CD rates). They normally keep everything in line so THEY make any money on the investment, not us peons.

Zippee

Why dick around with a loan and make things complicated?

If you get a loan you are going to have to make payments of $xx each month, why not just take that same amount and put it in the investment of your choice (mutual fund, stock, bonds) each month? More will me going towards building equity, not interest.

CrockPot

if you read the first post, i specifically said i wasn't planning on doing it...it's just something that came up in a casual conversation.

i put a good amount away beyond maxing my 401(k) every month as it stands, so i'm not looking at this scenario as a way around that.

chef chris

Best advice anyone can get, right there. SAVE!