No. of Recommendations: 1
How does the tax advantage offset the higher interest on the HE Loan? Wouldn't it be better to concentrate on that since the rate is so much higher?

Even though today the interest rate on your credit card is less than the interest rate on your home equity loan, it is likely to be only temporary. Not only do most credit card companies put a time limit on the "introductory" or "teaser" rates, but also any late payment or a payment under the minimum amount due will often immediately terminate the teaser rate. Worse, some credit card companies monitor your credit report so a late payment to anyone would move you from "minimum risk" to "moderate risk" and terminate the teaser rate, even though your payments to that specific credit card company have been exemplary.

Some people will routinely move balances from one card's teaser rates to another card's teaser rates, but those offers can dry up quickly, either because of one late or misdelivered payment, or because of continual increasing interest rate pressure from the Federal Open Market Committee (a.k.a., "Greenspan") still trying to cool the economy.

Enjoy the low rates while you can, but I would advise making long-term plans as if those low rates would end.

A typical home equity loan as the advantage of the interest paid being potentially tax deductable. My understanding may be incomplete, but this is how I understand it: The interest on your second mortgage and other home equity loans are tax deductable up to $100,000 aggregate current balance (not counting the first mortgage), and only to the extent that they are collateralized by your home. As long as your loan balances don't exceed the value of your home, you are ok. (Contrast that to someone who has a HEL that is "125% of the equity on your home"--only the interest on the loan up to that 100% of your equity is tax deductable, and the interest on the other 25% of the balance would not be because technically that is beyond the amount being collateralized by your home.)

Not everyone benefits from itemizing on their tax returns. If you do benefit from itemizing, and all your itemized deductions except the HEL are at least as large as the standard deduction, then the effective interest rate you are paying on the HEL is reduced by your marginal tax rate because of the reduced income tax you are paying:

ER = R * (1 - MTR/100)


ER = effective after-tax rate.

R = Interest rate of your home equity loan.

MTR = your marginal tax rate.

So if your marginal tax rate is 28% and the interest on your home equity loan is 9%, we have

ER = R * (1 - MTR/100)

ER = 9% * (1 - 28/100)

ER = 9% * 0.72

ER = 6.48%

It is very unlikely that you will find a credit card with a long-term interest rate as low as 6.48%.

Even if the HEL interest rate rises to 10%, the effective after-tax rate would still be only 7.2%
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