Making Cents: Using home equity to eliminate undesirable forms of debt

US Wealth Napolitano |

By: John P. Napolitano, CFP®, CPA, PFS, MST, RLP®

Even at today’s low interest rates, some families are walking around with high interest debt. Even worse, frequently that high interest debt is not tax deductible. For those with credit or spending problems, there may not be much relief for you except to earn more and spend less. But for families with reasonable to good credit, there are options to convert some of your nagging high rate debt into something at a lower cost where you may be able to extinguish the debt faster.

Many cringe when this topic comes up as they don’t want to encumber their home with personal debt. I also feel queasy on this topic, but want to make it clear that this is only a strategy to consider if you are positively sure that you will not run up these high rate types of debts again. Doing this to find yourself with high rate debt again in a year or two may be the worst of all scenarios.

Understand that by not using your home equity line for extinguishing other high rate debt, you may be costing yourself 10+% per year for the privilege of not encumbering your home. Even if you intend to pay off your high rate debt over 12 months, why pay 20% when you may be able to pay as little at 2-3%?  A rate 17% lower on $20,000 of debt equates to a one year savings of $3,400.

To get over the hurdle of using your home line of credit, understand this. If the home is in your name, and the credit card is in your name, then your home may ultimately be on the hook anyway. When you carry debt of any form with your personal guarantee attached, then all of your assets with the exception of certain retirement assets are available to the claims of your creditors to back up your guarantee.

In most cases the home equity interest paid may be tax deductible. The rules for deductibility of home equity interest allow for the interest on $100,000 of debt not used for the purchase or improvement of a home to be deductible. If you are using a home equity line to improve your home, then all of the funds borrowed up to a debt cap of $1 million will carry deductible interest.

As another form of protecting equity on your home above and beyond home debt is to file a declaration of Homestead on the home. In most states that declaration will protect an amount of equity against the claims of any other creditors other than your mortgagor. In my home state of MA, homeowners automatically receive a $125,000 homestead exemption without even filing. File the declaration of homestead form and you can protect up to $500,000 per family. For disabled residents and homeowners age 62 or older the protection limit rises to $1,000,000 per family.


John P. Napolitano CFP®, CPA is CEO of U. S. Wealth Management in Braintree, MA.  Visit JohnPNapolitano on LinkedIn or The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.  John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.