Using Mortgage Interest As An Itemized Deduction


Using Mortgage Interest As An Itemized Deduction 1

What is​ mortgage interest? it​ is​ any interest you​ pay on​ a​ secured loan when you​ bought your first or​ second home. the​ loans include the​ mortgage to​ buy your home,​ a​ second mortgage,​ a​ line of​ credit or​ a​ home equity loan. the​ loan must be secured debt or​ it​ will be considered a​ personal loan and the​ interest is​ not deductible.

For the​ average consumer who has managed to​ acquire credit card debt,​ car loans,​ and various other small debts,​ is​ the​ mortgage interest,​ especially with an​ interest only loan an​ answer to​ mortgage interest deductions and the​ elimination of​ non-deductible interest?

What options does the​ average consumer have in​ accommodating the​ tax need in​ relation to​ the​ housing need? What about the​ interest only loan option on​ a​ new house mortgage? Today’s housing and mortgage market has seen a​ tremendous growth in​ mortgage packages,​ variety and amount. the​ mortgage interest deductible on​ the​ interest only loan option,​ once thought to​ have gone the​ way of​ the​ Edsel automobile,​ is​ back today and in​ use by the​ masses. the​ mortgage market has seen an​ unbelievable increase in​ the​ interest only loans from just a​ mere sliver of​ the​ market a​ few years ago,​ to​ around 25% of​ the​ market share today. That’s huge growth,​ especially when you​ talk less than five years to​ experience that growth.

What benefit does the​ mortgage interest (especially the​ interest only loan) bring to​ the​ table,​ and does this benefit the​ homeowner as​ a​ taxpayer? This is​ one question the​ mortgage lender probably won’t be able to​ answer for you,​ and one you​ probably won’t think to​ ask. But you​ should,​ because it’s one question that can make a​ difference to​ you​ and to​ your federal tax return and the​ amount of​ the​ mortgage interest that will actually provide you​ with a​ federal income tax deduction. a​ mortgage interest deduction is​ one of​ the​ best financial reasons to​ purchase a​ home. Who gets the​ deduction? you​ do,​ if​ you​ are the​ primary borrower,​ legally obligated to​ pay the​ debt and actually make the​ payments. if​ you​ are married and both of​ you​ signed the​ loan then both of​ you​ are the​ primary borrowers.

The interest only loan and the​ amount of​ interest you​ can deduct on​ your income tax return are one and the​ same if​ your income levels are low enough; the​ concern for the​ average consumer is​ the​ total dollar value they get to​ take off their tax return. Quite often,​ the​ deductions for the​ consumer aren’t enough to​ contribute to​ the​ bottom line,​ because the​ income level the​ percentage of​ deductible interest is​ calculated on​ is​ simply too high. Higher dollar amounts in​ interest will usually mean a​ greater possibility of​ a​ greater deduction. There can be limits to​ the​ tax deduction. Your tax deduction is​ limited if​ all mortgages on​ your home are either more than the​ fair market value of​ your home or​ more than one million dollars ($500,​000 if​ married and filing separately)

The greater deduction would be the​ only advantage to​ the​ interest only loan as​ far as​ the​ taxpayer is​ concerned,​ unless of​ course,​ they use the​ money saved from the​ interest only loan to​ fund a​ 401k,​ an​ IRA,​ or​ an​ MSA (that’s a​ topic for a​ completely different paper). the​ mortgage interest and especially the​ interest only loan is​ sold to​ the​ consumer as​ a​ way to​ afford more house,​ pay off credit card debt,​ or​ provide a​ means to​ fund a​ savings of​ some kind,​ and if​ that’s true,​ it​ can be used for that purpose. And if​ you’re considering paying off those high interest credit cards,​ the​ mortgage interest you’re charged on​ the​ interest only loan is​ fully tax deductible,​ while the​ credit cards are not; a​ word of​ caution,​ however,​ make sure you​ don’t turn around and use those credit cards again,​ putting yourself right back where you​ started from,​ just with a​ bigger interest payment and less house equity.

Why has the​ market experienced such growth? It’s not totally related to​ the​ income tax benefit; the​ home mortgages of​ today satisfy a​ common desire for the​ consumer: instant gratification of​ bigger and better. Such is​ the​ case when it’s time to​ make those needed repairs,​ or​ house expansion. a​ second mortgage makes it​ possible to​ retain the​ same monthly mortgage payment,​ and still pull a​ lot of​ equity out of​ your home. This may sound like the​ ultimate solution,​ but is​ it​ really? it​ also adds to​ the​ amount of​ interest an​ individual can deduct at​ the​ end of​ the​ year; and if​ income levels are growing,​ the​ interest expense must grow in​ order to​ keep up. Now,​ this is​ a​ somewhat skewed way of​ looking at​ the​ benefit of​ a​ mortgage,​ but it​ figures right into the​ same scheme as​ the​ elimination of​ credit card debt and saving for 401(k) s as​ a​ valid reason to​ borrow money against your home.

Remember that your home mortgage must be a​ secured loan from your main home or​ second home. No deduction can be made for a​ mortgage from a​ third home,​ fourth home and so on. the​ mortgage and the​ resulting interest are great tools,​ when used by the​ right people,​ in​ the​ right situation. For the​ average consumer and long-term homeowner,​ unless you​ think a​ better deduction on​ your tax return is​ worth the​ forfeiture of​ equity in​ your home,​ you’d better think twice before re-financing with a​ second mortgage that generates more interest,​ but less equity.



Using Mortgage Interest As An Itemized Deduction



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