Q: I have about $40,000 left on my 15-year fixed mortgage at 4 percent interest. I owe about $13,000 on a home equity line that is 2.99 percent variable rate. I have a $100,000 equity line open. I have no other debt. I am considering paying off my remaining mortgage with the lower-interest home equity line. Do you think that is a good idea since I am giving up a fixed rate for a variable rate? I would pay both off in about three years. Also, if I close out my mortgage, can I still declare the interest on my taxes from the home equity line?
A: In general, I am always reluctant to advise readers to switch from a fixed interest rate to a variable one. I am old enough to remember when mortgage interest rates soared to 18 percent.
However, this is a personal decision for everyone, depending on your own financial situation. In this case, he will be paying off $40,000 at a current low rate, and because he has a home equity loan (called HELOC) of $100,000, if push comes to shove he will still have borrowing capability should he need cash to make the required mortgage payment on the new loan.
If you have other cash — just in case — then I think it makes sense for you to use your home equity loan to pay off your existing mortgage loan.
As for deducting the interest you pay on the HELOC, in general, you can deduct interest on such a loan up to $100,000 only. Let me clarify this: It does not mean you can deduct $100,000 of interest. It means that any interest earned on a loan amount over $100,000 is not deductible. In your case, since your HELOC is not over that threshold — and subject to any other limitations, such as how high your income is — you should be able to deduct all of the interest you pay on the HELOC.
Q: I read your article on the "Dos and don'ts of holding home's title in LLC." You note that a limited liability company can protect against judgment for lead paint. However, I was also reading a case in Maryland where the court ruled there was no protection from personal liability if the LLC member was managing the property.
I also believe that courts in California and several other states similarly have a narrow definition on the protection from LLCs.
So it does not appear that what you said about protection with LLCs is applicable across the country. Any thoughts?
A: Yes, there are narrow definitions on the protection afforded by owning property in an LLC. In the Maryland case, the member was managing, so he was personally actively involved; in other cases, the LLC commingled funds with other assets.
I once represented a managing member who was sued personally; unfortunately, he did not take my advice, since he issued a check out of his own personal checking account.
And I just read a case out of the 6th Circuit Court of Appeals (which covers Ohio, Kentucky, Tennessee and Michigan) where a homeowner put her personal home into a single-member LLC. She had filed for bankruptcy relief and claimed that her creditors could not attach her house because it was her homestead. The court ruled against her, stating that since she personally did not own the home, the homestead exemption did not apply.
But in general, LLCs will provide some protection. And if you are an investor, do not put more than one property into an LLC; set up a separate LLC for each property.
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