Finance mamas - I have a question

[oceanbaby]

We have a home equity line at an interest rate of 8.25%. My dad has offered to loan us the money to pay it off at an interest rate of 6%. But we would no longer be able to deduct the interest from our tax return. Does it make sense financially to do this? And is there any other disadvantage to turning this into a personal loan rather than a home equity loan? Thanks!

[DragonflyBlue]

I wouldn't think that it makes much sense.

But I'm also a firm believer in not mixing family with finances. It rarely works out...

Can you look into a re-fi through a lender? We had a higher rate like yours but just did a re-fi for 5.2%. Our credit isn't the best either.

Janis

[oceanbaby]

Well, it turns out that we can still deduct the interest, so we're going to continue to look into it.

We have good credit, but my dad is actually wanting to lend the money. (Long story, but basically he doesn't want to invest it but is looking to get a better return than a Money Market fund.)

[velochic]

It really depends on your marginal tax bracket and how much you are able to deduct from your gross income. Does the deduction bring you down a tax bracket? How is your dad going to calculate the interest? Daily? Monthly? How is your HEL caluculated? It's really not a simple yes or no answer, as the financial variables make a huge difference.

[McFeelings]

Has your father lent money before? To you or to others? I second the previous poster who cautions borrowing money from family when it isn't technically necessary. Would he be upset if you "prepaid" your loan if you found some money elsewhere? Will he be willing to provide you with the end of year paperwork you need to get your tax deduction? How do you feel about your dad using your debt to make money? If you defaulted on the loan, would he be willing to take your house as collateral? If not, would your father/daughter relationship still be able to continue?

8.5% on a second mortgage isn't unreasonable at today's rates. Once you have more equity in the home, perhaps you can refinance (with a professional lender) for a single mortgage.

[mightymoo]

Well, if you could still deduct the interest, then I would think from a financial aspect, then going from an 8.25% loan to a 6% loan makes sense. I could only see it being a 'what if' in the original scenario where you wouldn't deduct the personal loan.

Are you going to give your dad a mortgage? Meaning is the loan going to be tied to the property? You may want to make sure that you can still deduct interest if you don't do this. Remember you can do personal mortgages. If you are going to try to deduct the interest then you'll want to make sure this isn't something you need to do to make it legitimate.

On the personal side, there are pros and cons. It all depends on your situation and relationship with your Dad I should think.
For example, should things get tough, your Dad may be willing to let you delay payments for a while. That could be good, or he may not, or may do it but resent you for it, make your life miserable as a result. You need to talk about what should happen if say you do have an emergency and can't make payments - what will he do? You don't want to assume anything. Make sure you also take your DH's feelings into account - he may feel differently about being indebted to his inlaws than you do about being indebted to your parents. You don't want to put anyone in a situation where they are made to feel inferior or put down, etc.

And lastly, I would say make sure you get a lawyer to draw up all the papers properly and have everything spelled out, so that there is no confusion or misunderstandings later. If everyone knows exactly what their responsibilities are up front, there is less area for argument.

I personally don't think I would do it. I would just worry about it becoming a sore point and drive a wedge in our relationship.