Should I get a home equity credit line?

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Q: Would you please explain to me the pros and cons of acquiring a home equity credit line?... How does it affect your taxes?  Does it hurt/help?  What about your mortgage, does it help/hurt? When you go to sell your home, does this hinder or help you in the process?...   — Wendy S.,  Norfolk, Va.

A: For starters, you’re always better off shopping around for financial services than you are biting on that junk mail pitch. (If the offer was so good, and people really needed the service, why would they waste all that paper sending out pitches?) Still, there are reasons why you might want to take out a line of credit on your home.

This financial product is nothing more or less than what used to be called a “second mortgage.” In the good old days, when people still remembered the Great Depression and what could happen if you got too far into debt, it was not something you took out unless you absolutely had to.

Alas, all those marketing dollars by the financial services industry have put a much prettier face on the second mortgage. Today, it’s sold as a “tool” offering you “financial flexibility.” As long as you realize that this credit line is costing you money, and that it is guaranteed by your house (which you can lose if you get in over your head), you may want to consider it. (Those were some of the “cons” — here come some “pros.”)

Until the mid-1980s, any interest — including interest on credit card debt — was tax deductible. No longer. Now, you can only write off mortgage interest. But these credit lines, as we said, are really just mortgages, so you can deduct the interest on this debt from your taxable income. These “home equity” credit lines also come with lower interest rates than credit card debt because, again, you’re securing it with your house. So the risk to the bank is much lower than lending you plastic money. That means you might want to consider paying off your credit card balance with a home equity loan or credit line. You’ll pay less interest. And that interest will be deductible.

(A clarification: After this column was first published, several alert readers noted that there are limits on how much interest you can deduct on home equity borrowing. For details .)

You may also want to use a home equity line to pay for major expenses — like a new car or college tuition — if too much of your savings are tied up in your house. Again, you’ll borrow at lower rates than an unsecured loan, and you’ll get to deduct the interest payments from your tax return.

As for how it affects your mortgage, it will probably have little or no impact — other than raising your overall monthly payments depending on how much you borrow from the credit line. It could hurt your chances to get additional credit if the payments on your first mortgage and credit line use up all your available spending power.

So you need to be very careful not to over-do it. (We’re back to the “cons” now.) In general, lenders make it much too easy to borrow. Many of these credit lines, for example, require that you pay only interest for, say, 10 years. At that point you owe this big chunk of cash — the principal. But not to worry: your friendly lender will gladly roll the whole thing over for another 10 years — charging you more interest until you can pay it off.

And, of course, if you still haven’t paid down the credit line when you sell your house, you’ll take away that much less “equity” — money you could use for your next home, or retirement, or whatever.

Used wisely, these credit lines can be very useful. But if you don’t have the discipline to keep debt under control, they can quickly put you deep in the hole.