What You Should Know About Using a HELOC to Pay Off Tax Debt
When you get to the end of your tax return, it's disheartening to see you owe money to the IRS. If your tax debt is more than you can comfortably pay, you have a few alternatives to help you cover the shortfall. One solution is to use a home equity line of credit, also known as a HELOC, to pay off your tax debt.
The ins & outs of a HELOC
A home equity line of credit is a financial product that lets you borrow against the equity in your home. Your home's equity refers to the difference in your mortgage and the value of your home. If your mortgage is $150,000 and your home's value is $200,000, you have $50,000 worth of equity to serve as collateral for your HELOC.
What Can You Use a HELOC For? One of the top benefits of a home equity line of credit is that you can use the funds for anything, including paying off your tax debt. When you're ready to draw from your line of credit, you'll deposit the money into your checking account and then use it as needed to cover your expenses. You can use the funds to pay your current tax debt, or you may use the money to pay back taxes.
What Are the Advantages of Using a HELOC to Pay Off Tax Debt? Another advantage of a HELOC is that it has a low, affordable interest rate; the fees to establish the line of credit are also low. It's possible to set up a short or long-term payment plan with the IRS for your tax debt. However, you'll pay interest on your balance each month, and there's a fee for setting up the payment plan. When you compare the overall costs of a HELOC and IRS payment plan, it's likely that a home equity line of credit has lower interest and fees.
The payment for your HELOC varies based on your lender's terms. You may have a period where you only pay interest on the money that you borrow and then repay the entire amount at a later date. Or, you might have a revolving payment that varies based on the amount that you owe, similar to a credit card. Regardless, the payment for your home equity line of credit is likely to be less than the payment for an IRS payment plan.
Ready to apply for a HELOC? Contact CCCU today at 702-228-2228 to get started!