Ok, I keep hearing ads say "use your 2nd mortgage to pay off your car, consolidate credit cards!" etc. etc.

Now, if I do get a 2nd mortgage to do just that (buy a car or consolidate unsecured debts), how can the interest from the 2nd mortgage be tax deducted? I mean, they always say "see your tax adviser" as if you CAN'T write it off.

Any word of advice?

 

I wish I could remember exactly....it has something to do with the amount you borrow vs. the amount of equity remaining in your home.

Don't quote me on this, but it is something like...if you have 70K of equity in your home, and you borrow 30K to buy a new S, you have 40K remaining and therefore all 30K of loan is tax deductible.

However, if you have 70K of equity in your home and you borrow 50K to buy a new S and pay off old bills, you have 20K equity remaining and only 20K of your loan is tax deductible.

Can someone more informed than me clarify this please?

 

hmm, but how does the government know which part of the interest is deductible? or does the bank know?

 

If you take cash out of your home, (equity) and the amount is less than the value of your home then the total is tax deductable. You are in effect refinancing your house for less than it's assessed value. Some mortgages will give you 125% of the value of your home but you are limited to a tax deduction for interest equal to the value of your home. Taking out equity works well in a market area where the value of homes is escalating faster than normal because people want to buy there, and you can get your money back through a sale.

 

yup.

the interest you pay on the borrowed funds (up to 100% of your home's value) can be used as a tax deduction. In most cases, I would not reccommend using equity in your home to pay off a vehicle loan. Usually, auto loans are no more than 5 years long. The typical home equity loan is 20yrs. 7% interest over 5 years is substantially less than 4% interest over 20 years on the same principal amount.

However, if you accelerate your payments on the equity loan/mortgage, you can save yourself some money.

 

Also keep in mind that many of these places that advertise consolidation loans or 125% equity loans charge higher than market rates and tend to prey on people without much understanding of finance. Home equity loans, in most cases, can be obtained than cost less than the lowest 15 year mortgage rates. Remeber, you have to itemize to get the deduction (most home owners itemize but some do not if standard deduction is higher) and you should get a 1098 from the bank at tax time telling you how much you can deduct.

I don't believe in keeping lots of consumer debt, but when I need a loan, I use my home equity because I get the lowest rate and tax deducability. However, many folks are convinced to take out home equity loans to live beyond their means. If you can typically afford the car with a conventional car loan, a home equity loan may make it less expensive. If you can not afford it with a traditional car loan, someone may convince you to get a home equity because they get a commission, the loan is insured (typically) and if you go bankrupt, that is your problem. I think I read that the number of people that owe more than there car is worth is approaching 40% nationally.

The places that offer the best rates and lowest fees don't do much advertising, they don't need to. The places that advertise on TV, radio, and god forbid call you at home hope to snare you with a high rate before you look around. Check the business section of your nearest major metropolitan newspaper. Ours prints 5 lowest local rates for mortgages, home equities, car loans etc each week. Good luck.

 

there are good and bad things about it.......

good - you do save $ on your taxes if you itemize, and you income level is not so high that you are phasing out the itemized deductions..... plus sometimes the "line of credit" or "second mortgage" is at 4% interest (mine is) vs what you can get on a car loan.

bad - they trick you into "lower your monthly payment".... they do that by stretching your payments to 10-15-20 years........ so yes, you lowered your monthly payment, but you would have paid off the car in 5 years with the other plan.

Anyone with self control and financial sense can use a home equity loan from a credit union or other "decent" place (not benfificial / avco / blazer / HFC, etc.....) and then pay extra each month to pay off the loan in 5 years..... that way you get the 4% interest rate and it is deductible.

Watch for "closing costs" also..... most banks or credit unions won't charge, but most mortgage companies will.... application fee, possibly an appraisal, recording fees at the courthouse, etc......

 

I don't think I saw the correct answer to the question. You can borrow an additional 100,000 beyond the amount borrowed to buy/fixup your home, and the interest on the 100,000 is deductible. It has nothing to do with equity, except that if you have no equity, you probably won't get anyone to lend you money. And the 100K must be secured by your home. You can do anything with the 100,000 you want and still get the deduction. No, the bank doesn't know how much is deductible, you have to figure it when you do your taxes. The government doesn't know either, it's the honor system on your taxes (until you're audited).
This is not a good idea if there is a chance you can't make the payments. You could lose your home. If you aren't worried, it's a good way to consolidate your debts, get lower interest, adn get credit card interest etc. deductible.

 

[QUOTE]Originally posted by Morris
I don't think I saw the correct answer to the question. You can borrow an additional 100,000 beyond the amount borrowed to buy/fixup your home, and the interest on the 100,000 is deductible. It has nothing to do with equity, except that if you have no equity, you probably won't get anyone to lend you money.

 

[QUOTE]Originally posted by Morris
I don't think I saw the correct answer to the question. You can borrow an additional 100,000 beyond the amount borrowed to buy/fixup your home, and the interest on the 100,000 is deductible. It has nothing to do with equity, except that if you have no equity, you probably won't get anyone to lend you money.