Mortgage Interest is deductible . . . to a point

Every mortgage or home equity loan includes the words "consult your tax advisor" for a good reason.

Tax regulations allow the deduction of all of part of the interest on these loans, but there are exceptions and it pays to know the rules. So, educate yourself before you borrow against your home to pay those credit cards or loans or to buy a car.

Obviously, if you have the option of taking a loan against your home equity or borrowing money at a higher rate, then of course the loan against your home is a better idea.

At the same time, when you borrow to pay off those credit cards and then go out and then continue to charge on those credit cards again are defeating the purpose of getting ahead.

Plus, just because you are borrowing against your home, that interest is not necessarily deductible.

The Tax Laws
In 1986, the tax laws changed and no longer allowed the deduction of interest paid on auto, boat and credit card loans. This law made the home equity loan with deductible interest a much more desirable product.

Although fixed rate home equity loans typically carry an interest rate of 9%, 10% or more, the after tax rate on these loans is much less.

For instance, if you are in the 28% tax bracket, a 10% rate on that loan would have an after tax rate of just 7.2%. Even compared to that 9.9% credit card, you still are ahead of the game.

Up to $100,000
According to the IRS rules in Publication 963, you can deduct the interest on home loans up to $100,000 regardless of what you do with the money.

For loan amounts over $100,000, and up to $1,000,000 the interest is deductible if the money is used to purchase, improve or alter your home.

The IRS does not allow you to deduct the interest on loans over $100,000 if that money is used to pay off auto, credit card or other loans with
nondeductible interest.

The bottom line is "consult your tax advisor" is not a statement to be taken lightly and don't believe all those commercials with the big emphasis on refinancing to pay off your credit cards. You may still be ahead with the lower interest rate on a home loan than on a credit card, but know the rules.

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