Hi,

I've been thinking about opening a home equity line of credit and using it to pay off my high interest car loan. Will this help me in regards to tax deductions of interest paid, or will the interest paid on my home equity loan be ineligible for the home loan interest deduction because I used it to pay off my car?

RB

Zip Code: ronmbmd@houston.rr.com

Generally, you can deduct the interest you pay on up to $100,000 of a home equity loan not used to improve your home or refinance your existing mortgage.

One trap is that the interest you pay on your home equity loan (other than for improving or refinancing your home) isn't allowable under the Alternative Minimum Tax (AMT) calculation, so it may not end up being deductible to you.

Another pitfall is if you sell your home. If you have an outstanding equity loan, that will be paid off with the sales proceeds at closing, reducing the money you have available to purchase a replacement home.

And if you refinance your mortgage and equity loan together into a new loan, you might end up paying for your car over 30 years.

Tapping your home equity is very tempting, but don't overlook some of the pitfalls that I mentioned above.

Zip Code: aschwartz@mdtaxes.com