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Home Equity Line or Cash?

Should I get a home equity loan or pay with cash?

Home equity line of credit vs. cash payment for a boat: I am about to purchase a used boat. I can pay cash (about $35,000), or take out a home equity loan at 1% above prime,and deduct the loan interest from my taxes (28% bracket). My cash is only making about .05% apy. Which is the better way to pay for the boat, cash or home equity line of credit?

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Bill's Answer
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This is a very good (and popular) question. The decision of whether to tap your home equity for large purchase or debt consolidation is both common and very important. Home equity loans can be a great way to manage debt, though as we've witnessed in the mortgage crisis over the last few years, they also come with risks and other consequences. Start by thinking of your cash and the equity in your home as two distinct assets. Next, consider the advantages and disadvantages of using each.

For cash, the advantages are: you don't pay any interest on it, it is easily available and you won't have monthly payments. For a home equity loan, the advantages are: it's a relatively low-interest rate loan, the interest is (usually) tax-deductible and you keep your cash.

For cash, the one big disadvantage is that you won't have it any more. Having cash is great and once you spend it on your boat it is gone. You may be able to use your cash for investments, other uses, or as importantly, as a rainy-day fund. If you won't have a rainy-day fund (6 months of spending) once you use this cash, then that makes your decision a lot easier... don't suer your cash! The disadvantage of the home equity loan is that it is indeed, another loan and comes with interest and a decrease in the value of your house as an asset. If you struggle with payments in the future, the lender has the ability to go as far as to foreclosure in an effort to collect the debt.

There's a lot to think about and we hope this is helpful. Thanks for your question.

(7 Votes)
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  • BA
    Jan, 2010
    One tactic to consider is to open a negotiation with the creditor in which you explain to the creditor that if you two do not reach an accord you will have no choice but to file for bankruptcy.
  • A
    Jan, 2010
    What can I do about an equity line of credit that has matured the bank says I don't owe enough to do a loan modification?