If you have high-interest loans, a home equity line of credit may be advantageous--not only is the interest rate lower, but it may be tax deductible as well. If you already use a Schedule A, you can lower your taxes more by taking advantage of the interest deduction for a home equity line of credit.

Definition

A home equity line of credit is similar to a mortgage on your home. Unlike a mortgage, which you use immediately, a home equity line of credit means you can use part or all of it as you see fit. For example, if a bank gives you a $50,000 line of credit, you may want to use $25,000 to pay off credit card loans immediately and then use the other $25,000 later to do repairs in your home.

Advantage

The main advantage of a home equity line of credit is that the interest rate is usually lower than a credit card or even an automobile loan. The other advantage is that the government looks on it as a mortgage, and therefore, the interest is deductible--to a certain extent--on your income taxes.

Deductible

The amount of interest you can deduct for a home equity line of credit depends on how much your home is worth. For example, if your home is worth $150,000 and your mortgage amounts to $125,000, you may deduct the interest for an additional $25,000. Therefore, if you have a home equity loan of $50,000, you would only be able to deduct the interest on the first $25,000.

Improvements

Although the above example shows you could only deduct the interest on $25,000, there is an exception to that rule. If you use the home equity line of credit to improve your home and, therefore, increase its worth, you can deduct the entire amount of interest on your income taxes.

Bottom Line

There is a cap to how much mortgage interest you can deduct--$1 million--and it includes all debts you have on your home.

Source:

Home Equity Debt

Home Equity Line of Credit

Home equity loan interest is deductible -- to a point

More Information:

Deducting Your Mortgage Interest Under the Tax Code