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] 
>            http://www.gmu.edu/departments/economics/bcaplan
>   "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*

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