QandAs: Loans

Is interest on a home equity loan tax deductible?

Answer:
If you’ve applied and received a home equity

loan, the interest paid may be tax deductible. This is a huge perk for persons who need to lower their annual tax payments. This can apply to self-employed people and homeowners who own their home outright.

However, the interest a homeowner can deduct is conditional. For example, a home equity loan deduction can only occur on a first or second home. Moreover, you can only deduct the interest on home equity loans up to $100,000. If unsure as to whether you qualify for a tax deduction, it’s best to speak with a tax preparer.

Most of the time, homeowners who apply for a second mortgage or home equity line of credit acquire limited funds to serve an immediate purpose (debt consolidation, home improvement, etc.) However, some mortgage lenders offer 125% equity loans, wherein a property owner can borrow more than their home’s worth.

This type of home equity loan is risky. If property values continue to increase, it poses little threat. Yet, if property values decrease, you’ll owe more than the home’s worth. Those who apply for 125% home equity loans cannot deduct the interest paid on the difference between the home’s worth and the mortgage balance.


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