Surprising as it may seem, using a home equity loan to pay taxes is actually possible. Although getting a loan to pay your taxes may seem unattractive, the IRS advises that one of the best solutions to pay off tax debt is to apply for a home equity loan.
Here we’ll explain why getting a home equity loan may result in a good alternative to an IRS installment plan.
Getting a Loan to pay off IRS
If there is a federal tax lien on your home, you probably have trouble getting a loan.
However, taxpayers or lenders may request a federal tax lien to be secondary to the lender’s lien to allow for the refinancing or restructuring of a mortgage.
Home Equity Loan vs. IRS Installment Agreement
Generally, home equity loans offer more flexibility, as they allow you to spread out payments over a longer period of time. While the IRS payment plans are usually between 72 and 84 months, home equity loans are granted for terms between 5 and 30 years.
As long as you are on an IRS payment plan, penalties and interest will continue to accrue. Penalties for non-payment are 0.5% per month, but are reduced to 0.25% while being on a payment plan.
In addition to this, it must be taken into account that the interest charged by the IRS is variable and is compounded daily, while a home equity loan has a fixed rate. Taxpayers with good credit and home equity may be able to get a lower interest rate compared to the interest rates and penalties on IRS payment plans.
When Might an IRS Payment Plan be Better than a Home Equity Loan?
There are certain situations where it might be better to enter into a payment plan with the IRS, rather than apply for a home loan.
For example, if you are nearing retirement or expect to be out of work for an extended period of time, then you may qualify for Currently Uncollectible Status. This way you would not pay anything to the IRS until your financial situation changes.
We encourage you to consult with a tax professional to evaluate the IRS tax relief programs you may qualify for before applying for a home equity loan and putting your home at risk.