Dear Dr. Don,
We plan to build a swimming pool for our home in the coming year. As for how to pay for it, we are deciding whether to save the money, which should take about a year, or get a home equity line of credit or second mortgage and take a tax deduction on the interest expense.
We make about $175,000 a year and have no real debt, other than the house. Unfortunately, we do not have many deductions other than two children and filing as married filing jointly.
-- James Jumpin'
Ah, I don't get too many questions about swimming pools, so let's jump right in. I mean, let's try to help you to get the job done. Sorry, I couldn't resist.
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If you've decided that you want to have a pool, then why sit out a season while you save for it? If you can get the pool installed and have it running this season, that's what I'd recommend.
Saving over the next year
By your estimate, you can save the money over a year's time, so you can pay off the loan with only a year's interest expense. If pool prices rise by more than the interest expense over the following year, you've lost both a season in the pool and the savings.
Financing the project
How to finance the pool depends on the interest rate on your existing mortgage, the equity in your home and how long you plan to be in the house. A cash-out refinancing makes sense if it reduces the interest rate on your existing mortgage but carries higher closing costs than a home equity loan or line of credit.
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With a plan to repay the obligation quickly, you might be better off with one of the loans. Make sure you understand any prepayment penalties connected to the home equity line or loan.
If the mortgage interest deduction just replaces the standard deduction on your taxes, then it's not really helping you on tax savings. Take the plunge and let us know whether the water is fine.
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