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Using Mortgage Interest As An Itemized Deduction
By: Keith Hoyng
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.
About the Author:
Keith Hoyng is the web master and operator of www.quickcash2u.com which
is an excellent source of financial, travel, remodeling, and more key
information. Visit us at www.quickcash2u.com/TaxHelp.html
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