On Wed, 28 Jun 2000, Bryan Caplan wrote:
> Why isn't virtually everything financed by home equity loans? The tax
> advantage seems so large, and the loophole looks big enough to drive a
> truck through. What am I missing?
Several potential reasons:
1. Bankruptcy. In general, when one declares personal BK, one gets
to avoid all payment on unsecured debt and one does not get to
avoid payment on secured debt (like home equity loans). Personal
BK is pretty common these days. And, pretty much by definition,
the people who declare BK are people with lots of unsecured debt
(ie exactly the people you are talking about).
2. Application process. Applying for home equity loans is burdensome
for both the creditor and debtor. There is a large and ever growing
stack of required forms to be explained and signed. A credit card
requires one signature.
3. Limitations on tax advantage. There is a pretty strict limit on how
much home equity interest can be deducted for non-home-improvement
reasons. My recollection is that, if you have more than $100K in
mortgage debt, then you can deduct $0 in non-home-improvement
related interest. Furthermore, people with small mortgages may not
even itemize on their returns, rendering the advantage void. So,
the relevant people are those with a mortgage big enough to make it
worth itemizing but small enough that the tax advantage exists.
William B. Vogt Assistant Professor
H. John Heinz III School ph: (412) 268-1843
of Public Policy and Management fx: (412) 268-7902
Carnegie Mellon University [EMAIL PROTECTED]
Pittsburgh, PA 15213 [EMAIL PROTECTED]
> Prof. Bryan Caplan [EMAIL PROTECTED]
> "Is there anything more distinctly understood by all men, than
> what it is to see, to hear, to remember, to judge? Yet it is
> the most difficult thing in the world to define these
> operations according to the rules of logical definition. But
> it is not more difficult than it is useless. Sometimes
> philosophers attempt to define them; but, if we examine their
> definitions, we shall find that they amount to no more than
> giving one synonymous word for another, and commonly a worse
> for a better."
> --Thomas Reid, *Essays on the Active Powers of Man*