Johnnymac

I am about to purchase wood floors for my house. The total will be 7K. I have the cash to pay for it now but I am thinking of taking a Home Equity Loan for the total @ 3.9% on a 24 month term. I will then take the 7K and buy a money market certificate (the credit union version of a cd) at for either 2 years @3% or a 5 years @ 5.25%.

Since I can write off the interest on the loan come tax time I am trying to figure out if I will come out ahead when it's all said and done.

LegendKiller

With the two year maturity CD you would actually lose a bit of money after tax, since you would have to pay tax on the interest earned. On a 7000, 2 year, 3.9% loan you would only end up paying just over $200 in interest after tax, not a huge deal. Considering the time value of money, it would even be less. Personally, I would take out the home equity loan if you have something else to do with the cash, otherwise just pay cash.

On the 5-year you would make a risk-free profit, but you would have capital tied up for an extra 3-years, discounting that by the time value of money, you would be making very little, if any. The market doesn't usually allow arbitrage (risk-free) profits and it won't allow one here (especially after including transaction costs and such).

The story would be much different if you invested in the market at this point (kinda low), the same 5-year investment would earn much more.

johnnymk

Where can you get that interest rate for 5 years?

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Johnnymac

Thanks for the help LK.

The rates are from Pentagon Federal Credit Union (anyone can join with a subcription to Military Family Assoc or something like that)

www.penfed.org