| Interest - is an amount you pay for the use of | | | | less then the Fair Market Value of your home minus |
| borrowed money. | | | | any outstanding debt from your first or second |
| Several lenders are currenty offering amazing deals | | | | mortgage up to a loan amount of $100,000. |
| for 125% home equity loans. As highly advertized as | | | | For example, your home's fair market value is $150,000 |
| these loans are they don't highly advertize that the | | | | your outstanding debt or mortgage is $115,000. This |
| interest payments on these loans are not neccessarily | | | | means the equity that you have built from your home |
| fully tax deductable. | | | | is $35,000. |
| To understand why these interest payments don't | | | | Now your looking to cash in and a lender offers you a |
| qualify as tax deductable lets look at what is | | | | 125% home equity loan, 125% x $150,000 = $187,500 |
| considered a tax deductable interest payment. The | | | | subtract your outstanding debt of $115,000 and you |
| IRS website states that to be considered for full tax | | | | have qualified for a $62,500 dollar loan. So finally lets |
| deductable interest your mortgage must fall into one of | | | | divide this loan into two parts. |
| these three catagories: | | | | First $35,000 is your secured home equity debt and |
| | | | $27,500 is your unsecured home equity debt. The |
| 1. Mortgages you took out on or before October 13, | | | | problem lies that as discussed before the tax |
| 1987 (called grandfathered debt). | | | | exemption for interest paymentsonly covers the |
| 2. Mortgages you took out after October 13, 1987, to | | | | secured home equity debt amount, leaving you with |
| buy, build, or improve your home (called home | | | | the financial liability of paying off the interst on $27,500 |
| acquisition debt), but only if these mortgages plus any | | | | of your loan. |
| grandfathered debt totaled $1 million or less ($500,000 | | | | *Their is a notable exception in regards to the purpose |
| or less if married filing separately). | | | | of the home equity loan. If the loan is used for home |
| 3. Mortgages you took out after October 13, 1987, | | | | improvement it can possibly be considered as a "home |
| other than to buy, build, or improve your home (called | | | | aquisition debt" and the interest payments may be |
| home equity debt), but only if these mortgages totaled | | | | deductable for a loan greater then your actual equity |
| $100,000 or less ($50,000 or less if married filing | | | | value. |
| separately) and totaled no more than the fair market | | | | The best course of action is to always speak to a tax |
| value of your home reduced by (1) and (2). | | | | advisor regarding any type of home loan. Being aware |
| As described by the IRS to be considered as home | | | | of tax deductions and liabilities can save you a huge |
| equity debt the amount of the loan must be equal or | | | | headache and possibly thousands of dollars! |