In this article, we’ll explain why getting a home equity to pay back taxes can be a great alternative to an IRS streamlined payment plan.
Will you be able to get a loan?
If there is a federal tax lien on your home, you may have trouble getting a loan.
However, taxpayers or lenders also can ask that a federal tax lien be made secondary to the lending institution’s lien to allow for the refinancing or restructuring of a mortgage.
Home equity loan vs. IRS streamlined installment agreement
Amount of time to pay
IRS payment plans are typically between 72 to 84 months.
Home equity loans can range anywhere from 5 to 30 years.
If you want the flexibility of spreading out the payments as long as possible, home equity loans are the clear winner.
Total amount paid
While you are on an IRS payment plan, penalties and interest will continue to accrue.
Failure to pay penalties are 0.5% per month, but reduced to 0.25% while on a payment plan.
In addition, interest is variable and compounded daily. IRS interest rates have fluctuated between 3% and 11% historically. It is at 3% as of 1st quarter 2021.
According to Bankrate, “As of Feb 15, 2021, the average Home Equity Loan Rate is 5.86%.”
It’s too close to call a clear winner on this factor. On the one hand, the average home equity rate is about the same as interest and penalties on an IRS payment plan. But keep in mind that a home equity loan has a fixed rate while the interest the IRS charges changes every quarter.
In certain situations, an IRS payment plan might be better than a home equity loan
There are some situations where it might be good idea to enter into a payment plan with the IRS.
If you are close to retirement or expect to be out of work for a long period of time, you might later qualify for currently not collectible where you would pay nothing to the IRS until your financial situation changes.
You should always explore any other IRS debt relief programs you may qualify for before committing to add more debt.
You should consult with a tax professional before making any decisions about how to best resolve your tax debt.