BORROWING ON THE HOUSE.
"You have the power to release the equity in your home", says the bank advertisement.
Use the equity accumulated in your house to purchase other things.
It may not be a bad idea. If you plan to buy a car on credit, or if you already have debts such as retail store or credit cards,
you may be better off borrowing on the equity of your house to pay those debts or purchase that car.
Why? Because interest on debts on your house is deductible while personal interest on other types of debt is not.
Debt on your house is classified in two parts:
1) Acquisition indebtedness.
2) Home equity indebtedness.
Acquisition indebtedness is debt that you incur in buying the house, in construction, or in substantial improvements in the house.
Refinancing of that debt is also included. The debt allowed is $1,000,000 (anybody worried about exceeding that?).
Home equity indebtedness is all other debt, regardless of how the funds are used.
The debt allowed in home equity indebtedness is $100,000. Interest attributable to the above debt is fully deductible as an itemized deduction.
Interest attributable to the excess over those amount is not deductible.
Actually, the amounts allowed appear to be quite generous. How many people owe more than one million dollars on their home,
and how many people borrow more than $100,000 to buy a car, or pay for their trips to Las Vegas?
The concern is not one of deductibility of interest, but whether it is economically practical to borrow money on your house
to pay for or buy other items. What are the financing or refinancing points paid? What is the rate of interest?
What are the other transaction costs involved such as appraisals, escrow, credit reports, etc.?
Does the deductibility of interest offset those costs?
And, what is more important, am I willing to jeopardize the most valuable possession that I have, my house,
so that I can enjoy other things? What if there is a down turn in the economy, can I pay both,
my original mortgage in my house, and the second mortgage?
Using the equity in your house to replace other debt may be a good idea,
but it requires that you make some careful calculations as to its net economic benefits and its effect
on your peace of mind.
NOTE: for article on business financing click on this link: Obtaining a Business Loan.
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