Home-equity loans become debt of choice Borrowers get tax deduction

May 10, 1992|By Kiplinger's Magazine

In growing numbers, Americans are shucking their debts. But for homeowners who must borrow, a home-equity loan is almost always the cheapest source of credit.

Not so long ago, taking on debt seemed like a wise financial move -- inflation let you make payments in cheaper dollars and the interest payments were tax deductible.

Now inflation is moderate and Uncle Sam no longer provides tax subsidies for most borrowing.

Still, if debt freedom sounds great in theory but impractical because you have no choice but to borrow, a home-equity loan is the debt of choice for anyone who owns a home.

The interest you pay is relatively cheap and fully tax-deductible for loans up to $100,000.

Rates usually float one to two percentage points above the prime rate, which is currently 6.5 percent. If you buy your next car with a home-equity loan at 8 percent interest, for instance, your after-tax interest would be just 5.76 percent, assuming you're in the 28 percent tax bracket.

That's almost 50 percent off the cost of a regular, non-deductible auto loan.

Careful shopping for a home-equity loan can pay off handsomely.

The downside of home-equity loans: The loan must be secured by your first or second home, which puts your house on the line if you can't repay. And the minimum payments required by the lender on a home equity line of credit can stretch the loan out almost forever.

When buying a car, for example, if you pay off a $15,000, 8 percent line of credit over 10 years ($182 per month), you'll pay almost $7,000 in interest. Repay the same loan in four years (payments of $366 per month) and you'll only pay about $2,500 in interest.

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