Credit crunch is making home equity loans harder to get

Q Does a home equity loan fall under the category of consumer debt ? A Consumer debt consists of any means used to finance personal purchases. Statistical data on consumer debt are released monthly by the Federal Reserve and include auto loans, credit cards and home equity lines of credit. The Federal Reserve does not include mortgages in this category. Consumer debt has been a hot topic because many economists are concerned about excessive borrowing.

However, with home sales plummeting and home prices leveling off or declining, home equity lines of credit have become less available. That has pushed some individuals to rely on credit cards to finance their purchases. The lack of available credit to consumers, especially during the holiday season, may stunt economic growth.

Here is an important distinction: Even though a home equity line of credit is considered consumer debt by the Federal Reserve, the IRS allows you to deduct the interest on this loan up to $100,000 regardless of what the proceeds are used for. This makes home equity loans tax advantaged in a way that auto and credit cards are not. There’s been some good news for those who have outstanding balances on their home equity credit lines.

Interest rates have declined after the Fed lowered both the federal funds rate (which is the rate that banks pay each other for short-term loans) and the discount rate (which is the rate charged on direct borrowing from the central bank). These reductions help cut borrowing costs for businesses and individuals on various loans including home equity lines and some credit cards. As a consumer, you should become familiar with the published interest rates that directly affect your credit lines.