The home equity line of credit (HELOC) is a relatively new lending product. It seems that almost everyone has considered taking out a home equity line during the past few years. But, before the early 90′s, home equity borrowing was practically unheard of.

The U.S. EcoMonitor recently published a very worthwhile article detailing the history of the home equity line of credit and explaining how the nation entered the current mortgage crisis.

Here are the basics:

“The federal and many state governments promoted what is generally regarded as the social good of home ownership by providing a tax deduction for interest paid on mortgage loans. Prior to the Tax Reform Act of 1986, however, governments also permitted taxpayers to deduct almost any other kind of interest they incurred as well and the credit card companies and other consumer lenders naturally benefited, as their “product” (unsecured credit, auto loans, student loans, etc.) was this made cheaper to the consumer. After the non-mortgage interest deduction was phased out in the early 1990’s, a new financial product came over the horizon – the Home Equity Line of Credit, or HELOC. At first, the HELOC was designed to solve the problem created by the elimination of interest deductions on consumer loans. Simply grant a lender a second mortgage on your home and suddenly, as long as you had less than $1 million in total home loans, you could deduct all of the interest on what really was a personal line of credit.”

It’s amazing how a small piece of legislation could have such a lasting effect on the economy and the public’s view of homeownership.

See Also:

HELOC Tax Deductions

How a HELOC Works

Tags | Heloc, home equity line of credit, tax deduction