Your Mortgage Interest Deductions  Two Kinds of Debt  Refinancing Your Mortgage  Second Mortgages

Home Equity Lines of Credit  Loan Type Varies Interest Deduction  The Tax Benefits of Selling Your Home

Your Mortgage Interest Deductions

Listed below are the topics covered in this document.  

• Homeowner Profile
• Gross Income - $35,500 
• House Price/Mortgage Size - $115,000 - $23,000 down = $92,000 
• Loan Type - 30-year Fixed-Rate mortgage at 10% 
• Property Tax - 1.23% of home value ($1,415) 
• Filing Status - Files jointly/four exemptions

• Example of the impact of the Mortgage Income Tax Deduction on Annual Homeownership Costs: 
• Before-Tax Homeownership Costs

Mortgage Interest=$9,177 
Property Taxes=1,415 
Total of Before-Tax Homeownership Costs=10,592 
• Itemized Deductions 
• Homeownership Deductions

Mortgage Interest= $9,177 
Property Taxes=1,415 
Non-homeownership Deductions= 2,000 
Total= 12,592  
• Standard Deductions=5,450
• Total Itemized Deductions=$7,142

Multiply Total Itemized Deductions by Marginal Tax Rate to get Homeownership Tax Savings: 
$7,142 x .15 = $1,071  
• After Tax Homeownership Costs = Homeownership Tax - Before Tax Savings:

$10,592 - 1,071 = $9,521

Two Kinds of Debt

When you borrowed the money is also important. Home loans taken out before October 14, 1987, are exempted from the new rules. You may fully deduct interest paid on these loans, regardless of their size or what you used them for. Any refinanced debt you incurred before October 14, 1987, is rolled into your total acquisition indebtedness. On loans made on or after October 14, 1987, you can deduct mortgage interest paid on acquisition indebtedness up to a total of 1.0 million. This means you could buy a home for $250,000, a beach home for $200,000, and add a family room to your first house for another $100,000, and still have $450,000 to spend on these homes for further improvements before you reached your limit for interest deductibility. The $1. 0 million is not cumulative. As you pay off a loan, you would add that amount to your total purchasing or improving up to two residences.  

Your equity indebtedness limit is $100,000. That means that you can borrow up to $100,000 of the equity in your home and use it for whatever you want. This is a change from the pre-1986 tax rule that limited your equity borrowing beyond the purchase price to certain qualified expenses, such as home improvements, medical and education expenses. 

Refinancing Your Mortgage

When refinancing your mortgage, you will probably pay 3 percent to 6 percent of the loan amount in closing costs-for surveys, legal fees and paperwork fees. Many of these closing costs are deductible, but not necessarily in the year that you refinance. I f you are considering refinancing your mortgage under the current tax rules, however, there are a couple of things to bear in mind. If you refinanced before October 14,1987, for a longer term than was remaining on the pre-October 14 loan, you may only de duct the interest paid on the mortgage for the term that was remaining on the old loan. So if you refinanced a loan with 15 years remaining for a 30-year loan with lower payments, you can only deduct the mortgage interest paid on the new loan for 15 year s. The one exception is if you had a balloon mortgage payment come due after October 13,1987 and you refinanced it to a loan of not more than 30 years; you get the deductibility for the full term of the longer loan. Any refinanced debt you incurred before October 14,1987, is rolled into your total acquisition indebtedness.  

In the past many homeowners have refinanced mortgages on their appreciating properties to draw on their equity to buy a new car or take a vacation. Under the new tax system, homeowners will no longer have unlimited mortgage interest deductions when drawing on equity. Any equity debt incurred is subject to a limit of the amount of on equity. Any equity debt incurred is subject to a limit of the amount of the existing debt plus $100,000. Say, for instance, that you bought your house 10 years ago and have seen the property grow in value from $70,000 to $230,000. If you refinance your mortgage (on which you now owe $50,000), you may only deduct the interest paid on the total of your acquisition indebtedness in the property ($50,000) plus $100,000. You will be able to deduct the interest paid on $150,000. 

Second Mortgages

You may deduct the interest paid on second mortgages made on or after October 13,1987, up to the $100,000 limit had already been reached when the first mortgage was taken out. The amount of second mortgages made before that date is part of your acquisition indebtedness total figure. This means that if you had $50,000 left on your first mortgage as of that date, and had taken out a $25,000 second mortgage on the property prior to October 14,1987, you would have an acquisition indebtedness of $75,000. 

Home Equity Lines of Credit

Where the traditional second mortgage gives the homeowner money in one lump sum the home equity line of credit allows homeowners to use the equity in their home like a giant credit card. The lender allows the homeowner to borrow at will against the equity in the home, and charges interest only on the portion of the equity borrowed against. Therefore, your interest deductions for a home equity line of credit depend on whether you borrow against the equity during that year. 

Loan Type Varies Interest Deduction

30 Year 15 Year Bi-Weekly Fixed Rate Fixed Rate Mortgage At 10% At 10% At 10% Monthly Payment $ 658 $ 806 $ 658 (329 X 2) Interest Cost First Year $ 7,481 $ 7,398 $ 7,434 Fourth Year $ 7,336 $ 6,606 $ 7,061 Mortgage Balance First Year $ 74,583 $ 72,726 $ 74,476 Fourth Year $ 73,052 $ 64,732 $ 69,817 Interest Cost/Life $ 161,942 $ 70,062 $ 104,331 Difference from 30-year -$ 91,880 -$ 57,611 

The Tax Benefits of Selling Your Home

   

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