"Smart Assets," CNNfn TV,
March 14, 2002

Consolidate Debt, Deduct Interest with a Home Equity Loan

MODERATOR: If you own your house and you need some money tap into your home equity. Borrowing against real estate generally offers a very low interest rate and a tax deduction as well. Valerie Morris is at the Smart Assets desk with the pros and cons of a home equity loan.

VALERIE: Home equity loans are essentially second mortgages and usually have somewhat higher rates than first mortgages because the lender is essentially taking on more risk. The key here is that the interest on home equity loans, it's deductible. According to Michael Moskowitz, the president of Equity Now, if you want to consolidate debt and deduct interest payments off your taxes, an equity line is the way to go.

MICHAEL MOSKOWITZ: You would get a home equity loan compared to a personal loan because No. 1, many people can't get a personal loan depending on their credit. But a personal loan is not tax-deductible and it is anywhere from 3 to 5 percentage points higher than a home equity line.

VALERIE: We wanted to offer a couple of tips as you shop around for home equity lines of credit. You'll get the best interest rate on a home equity loan if the total amount of your first mortgage and your new line of credit don't exceed 80% of your house's fair market value. There's a $100,000 limit on tax deductibility for home equity indebtedness. Any interest charge on the part of your equity loan that's more than the $100,000 is seen as consumer interest by the Internal Revenue Service.

Now, the IRS says that deductible home equity debt cannot exceed the fair market value of your house. That means interest charges for anything you borrow in excess of the current value of your house is not tax-deductible. Before deciding whether to get a home equity loan, you should weigh the costs of against the benefits and the advantages, that like a mortgage, a home equity loan offers one of the few interest payments still recognized by the IRS as a deduction on your tax return. What's more, if you negotiate a good rate, the interest can be much lower than on many other forms of debt. That's it from the Smart Assets desk.