I'm in the process of financing about $30-40K in home improvements with a HELOC product which, as of today is being offered @4.5% with no fees or penalties. I also have a money market savings account which is currently paying 3.6% with no restrictions on liquidity above a minimum balance.

So the question is... Would it make sense to go ahead and draw the full amount from the HELOC up front, and deposit the funds in the money market account, thus recovering the effective difference in interest during my project, or are there tax or credit ramifications that would make this unfavorable down the road?

Well unless you miss typed I believe your plan is flawed.

HELOC loan @ 4.5% vs Money Market account @ 3.6% means you're losing (.9%)

Perhaps if you borrowed more money you could make it up on volume!



That's the way the USA Gubment does it!

__________________
Gary Spicuzza, *SAFE
Copyright 1956
No Rights Reserved
*Self Appointed Financial Expert

Gary- I think what he is trying to do is time the market. I think his plan is to withdraw the full amount so he locks it in at 4.5% and then depo it until he needs it earning 3.6% therefore paying 0.9% as a "convenience fee" for locking now. He avoids the possiblity of rates going up before he needs the full amount. Not a bad plan IMO, unless he doesnt need the funds very soon.

realworldknowledge wrote:
It's a bad plan.

Let's play with simple math and per annum interest just for fun.

$40,000 loan @ 4.5% equals $1,800 interest paid per year.

$40,000 @ 3.6% money market account equals $1,440 interest earned per year resulting in the loss of $360 dollars.

But wait, this money is earmarked to be spent on home improvements....the "spent" money doesn't reside in the money market account.

$40,000 loan @ 4.5% equals $1,800 interest paid per year.
$30,000 spent on home improvements leaves $10,000 in money market account that earned $360 per year.

Total out of pocket interest paid is now $1,440.

Hmmmm, great, I'm EVEN..... no loss, no gain? Right?

No silly!

Had you only financed what you spent....the $30,000 @ 4.5% equals $1,350 paid in interest per year. That flawed technique results in you paying $90 per year more in interest and it gets worse if the money market rates drop!

But like I wrote above:

Quote:

Perhaps if you borrowed more money you could make it up on volume!

__________________
Gary Spicuzza, *SAFE
Copyright 1956
No Rights Reserved
*Self Appointed Financial Expert

You are making your life too complicated. Your home improvements shouldn't take long enough to get any real benefit from recouped interest.

Just pay your contractor and move on.

Someone once told me to avoid making the answer more complicated than the question. You are making your answer more complicated than your question.