Would it be better to refinance or get an equity line of credit?

by Phillip Foster, CPA

My husband and I would like to use our home's equity to finish landscaping our yard as well as make other improvements on our property. A national mortgage company has offered us two products. With one, we would refinance our loan for a 30-year period and would get the money we need for the improvements. The other is an equity credit line tied to the prime rate with no loan or closing costs. We would only be required to pay the monthly interest cost. Which option is the better use of our available credit, and which is the more financially sound idea? If it is the equity credit line, would we be better off just paying the interest and waiting until we sell our house to pay the principal?

To properly answer this question, I would need to know the following:

The number of years you plan to stay in your current house.
The interest rate and remaining time on your current mortgage.
The amount you intend to borrow for improvements.
How quickly could you pay off the loan, given your current budget and cash flow?

Usually it doesn't make sense to refinance your first mortgage unless you can reduce the interest rate by one percent or more. You also would need to factor in such things as points and closing costs, fixed vs. adjustable rates, and amortization options (e.g., 15- or 30-year loan). With the information provided, I suggest that a no-cost equity credit line would be best because you will have access to the money you need for improvements and only pay interest on the amount used. That way you get to use the bank's money for your own benefit. And since you will be borrowing on your mortgage, you should be able to deduct the interest on your tax return.

Phillip Foster, CPA, is principal of Phillip S. Foster, CPA. He can be reached at (800) 600-1272.

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