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Investment Planning |
Home Mortgage Interest
Generally, you can deduct all of the interest you pay on a home mortgage. However, your loan must meet one of the following criteria to be fully deductible:
- The mortgage was taken out before October 13, 1987.
- The outstanding mortgages on your home, including those for buying, building, or improving your home, total less than $1 million.
- The mortgage was not taken out to buy, build, or improve your home, and the debt on this mortgage is both no more than $100,000 (or $50,000 if you're married and filing separately), and no more than the fair market value of your home reduced by any other outstanding mortgages.
Here is a planning idea you can use to turn non-deductible personal interest into deductible interest with the use of a home equity loan. The benefit of interest paid on a home equity loan is that it is tax deductible. Personal interest that you pay--for example on credit cards or a car loan--is not tax deductible. If you have personal debt that is less than $100,000, you may want to consider taking out a home equity loan. Home equity loans are less expensive than other types of credit. For example, if you pay nine percent interest on a home loan, and you are in the 30 percent tax bracket, the net cost of this loan is 6.3 percent. Compare this after-tax interest rate to the high interest rate of credit cards, which can exceed 18 percent, and you'll clearly be ahead with the home equity loan.
Proceed with caution however, if you anticipate cash flow problems. Your home, and not the items you purchased with the borrowed funds, can be repossessed if you fail to make payments.
Tips Disclaimer
These tips contain information that may change over time as a result of new tax legislation. Although we make efforts to keep this information current, you should check with your tax advisor before taking action based upon any information contained in these tips.