Dear Liz: I borrowed $35,000 from my home equity account a couple of years ago to pay for a new roof. The house is paid for; there is no mortgage. My wife thinks I should pay off the balance, which is $29,000. This would create a significant gap in our liquid assets. The current payment is affordable and convenient, so I’m content to leave things the way they are. Am I missing something?
Answer: That depends on what you mean by “home equity account.”
When you borrow against your home’s equity, you typically use either a home equity line of credit or a home equity loan. Home equity loans usually have fixed interest rates, fixed payments and a defined payback period, such as 10 or 20 years. Home equity lines of credit are more like credit cards: They have variable interest rates, and you can draw down and pay back what you owe more flexibly.
However, HELOCs have a bit of a built-in trap. In the initial draw period, usually the first 10 years, you often don’t have to pay down what you owe. You’re typically required to pay only interest. When this draw period ends, you must begin making principal payments on any outstanding balance, so what you owe each month can shoot up dramatically.
That’s why HELOCs are often best used for expenses that can be paid off relatively quickly. If you need a decade or more to pay back what you owe, a fixed-rate home equity loan may be a better option. Some lenders offer a fixed-rate option as part of their HELOCs, which could allow you to lock in a steady rate on some or all of your balance and pay it off with fixed payments over time.
Regardless of what type of loan you have, the interest you’re paying probably exceeds what you’re earning, after tax, on your savings. Paying off a HELOC balance would allow you to tap that credit again in an emergency, if necessary. Paying off a fixed-rate loan wouldn’t free up credit immediately, but you could redirect the monthly payments into your savings to rebuild your cushion. If that makes you nervous, you could consider making larger monthly payments to pay back the loan sooner while keeping the bulk of your savings intact.
Is it only the bread winners who get Social Security?
Dear Liz: How is it that elderly people who have never contributed to Social Security can collect a check? My wife’s grandmother was getting more than $1,000 a month.
Answer: Spousal and survivor benefits are nearly as old as the Social Security program itself.
Social Security was signed into law in 1935. Initially, benefits were only for retired workers. In 1939, benefits were added for wives, widows and dependent children. Later changes added spousal and survivor benefits for men as well as disability benefits.
Social Security isn’t a retirement fund where workers deposit funds into individual accounts. Instead, it’s a social insurance program designed to provide income to retirees, workers who become disabled and the families of workers who die. Benefits are paid using taxes collected from current workers. Like other insurance, the system is designed to protect people against significant economic risks, such as outliving your savings, losing your ability to earn income or losing a breadwinner.
In other words, your wife’s grandmother may not have paid into the system, but her spouse or ex-spouse did, and that provided her with a small source of income.
When giving cash gifts, does anyone need to pay taxes?
Dear Liz: I am a widow age 95. I would like to give my three kids, who are in their 60s, $5,000 each this year. What are the taxes, and who pays them?
Answer: Gifts aren’t taxable to the recipients, and the only givers who have to pay taxes are those who have given away millions of dollars during their lifetimes.
Let’s start with the basics. You only have to file a gift tax return, which notifies the IRS of your generosity, when you give someone more than the annual exemption limit, which is $18,000 in 2024. So you could give your kids $54,000 before the end of the year and not have to tell the IRS.
You wouldn’t actually owe taxes on your gifts until the amounts you give away above that annual limit exceed your lifetime gift and estate limit, which is currently $13.61 million.
A taxable gift is typically deducted from the amount that avoids estate taxes at your death. But if you have enough money to worry about that, you should have an estate planning attorney who can advise you about how to proceed.
Liz Weston, Certified Financial Planner, is a personal finance columnist. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at .
