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