Home Mortgage Interest Deduction - IRS Pub. 936

Let's assume for a moment you have $40,000 of equity sitting in your home and $40,000 sitting in an investment account earning 7%.

Now you need to spend $20,000 for a car. (Or, College, Doctors Bills, etc.) You have three basic options:

1. You could take the money out of your investment account and pay for the car. Your cost is $20,000 plus the 7.0% of interest you lose each year on the $20,000. ($1,400 per year) In five years you've spent a total of $27,000. ($1,400 x 5 years + 20,000 = $27,000) And, you still have $20,000 less in your savings and you continue to lose $1,400 of interest per year.

2. Or, you could take out a 5 year auto loan and pay 10% interest. The payment would be $425 per month. In 5 years, you would have spent a total of $25,500. However, because it's consumer debt, you can't write it off on your income taxes.

3. Or, you could borrow the money from the equity in your home @7% and then pay the equity loan payment of $396.02 . In 5 years, you would have paid a total of $23,762.  However, because the interest on the equity loan is a tax write-off you have saved an additional $1,000 or more in income taxes savings, making your total cost less than $22,762...

There is a 4th option which is even better...