[makia05]

How much would a person save by borrowing money at 6 percent for a home equity loan versus 18 percent for a credit card loan? Assume a marginal tax bracket of 30 percent.

[Schoolmarm97]

A better question is whether the use to which the person plans on putting the money is worth using the house as collateral. Typically, if one takes a home equity loan (which is a sum of money added to the balance of the mortgage but often at a different rate), the best reason is to do home improvements that increase the resale value of the home, not for purposes unrelated to that. Since this person's other option is credit card debt, I'm guessing s/he has some other plan for the money.

But to answer the question, home equity loans are fixed-rate mortgages and the interest can be deducted from your taxes, so at the 30% rate, you actually save 30% of the interest. You can get a loan of up to $100K and still deduct the interest. A home equity line of credit is more like a credit card. It's a variable-rate credit line that you use as needed instead of a lump-sum cash payment as in the equity loan. The interest on your credit card is not tax-deductible, so at 18% it's can be unmanageable to pay off unless you pay the entire bill every month.

That's the other difference. If you charge something on your credit card, the interest rate only applies if you do not pay off the balance each month, so in essence, you borrow money for a period interest-free if you charge then pay off each time. A cash advance on a credit card is rarely a good thing as one almost never does that if one has cash on hand. A bridge loan--a credit card advance that will be paid off on time--is sometimes used to, say, buy a car before a paycheck has cleared the bank or for some other big-ticket item (I did it once for a house down-payment), but the interest is charged daily, which makes it a math problem that needs to be calculated precisely to be sure it's worth the risk. A home equity loan carries interest from day one just like any other mortgage.

Default on a home equity loan or line of credit costs you your house. Default on a credit card costs you your credit. Either way, you're taking a risk.