Mortgage Interest and Your Itemized Deductions. Interesting Points to Bear in Mind

For the average shopper who has managed to acquire credit card debt, automobile loans, and a variety of other small debts, is the mortgage interest, especially with an interest only loan an answer to mortgage interest deductions and elimination of non-deductible interest?

What options does the average shopper have in accommodating the tax need in relation to the housing need? What about the interest only loan option on a new mortgage? Today’s housing and mortgage market has seen a wonderful growth in mortgage packages, variety and amount. The mortgage interest deductible on the interest only loan option, once thought to have gone the way of the Edsel automobile, is back these days and in use by the masses. The mortgage market has seen an amazing increase in the interest only loans from just a mere sliver of the market a few years ago, to around 25% of the market share in our day. That’s huge growth, particularly when you talk less than 5 years to experience that growth.

What benefit does the mortgage interest (particularly the interest only loan) bring to the table, and does this benefit the homeowner as a taxpayer? This is one question the mortgage lender possibly won’t be able to answer for you, and one you possibly won’t think to ask. But you should, since it’s one question that can make a difference to you and to your tax return and the sum of the mortgage interest that will actually provide you with a tax deduction.

The interest only loan and the amount of interest you can deduct on your tax return are one and the same if your earnings levels are low enough; the concern for the average shopper is the total dollar value they get to take off their tax return. Pretty frequently, the deductions for the consumer aren’t enough to contribute to the bottom line, for the reason that the income level the percentage of deductible interest is calculated on is just too high. Higher dollar amounts in interest will typically mean a greater possibility of a greater deduction.

That would be the only advantage to the interest only loan as far as the taxpayer is concerned, unless sure, they use the money saved from the interest only loan to fund a 401k, an IRA, or an MSA (that’s a topic for a completely different paper). The mortgage interest and particularly the interest only loan is sold to the customer as a method to afford more house, pay off credit card debt, or provide a means to fund a savings of some sort, and that’s true, it can be used for that reason. And if you’re considering paying off those high interest credit cards, the mortgage interest you’re charged on the interest only loan is fully deductible, while the credit cards are not; a word of caution, however, make certain you don’t turn around and use those credit cards again, putting yourself right back where you started from, just with a bigger interest payment and less house equity.

Why has the market experienced such growth? It’s not completely related to the tax benefit; the home mortgages of today satisfy a common desire for the consumer: instant gratification of bigger and better. Such is the case when it’s time to make those required repairs, or house expansion. A second mortgage makes it possible to retain the same monthly mortgage payment, and still pull lots of equity out of your home. This may sound like the ultimate solution, but is it truly? It in addition adds to the amount of interest an individual can deduct at the end of the year; and if earnings levels are growing, the interest expense must grow in order to keep up. Now, this is a somewhat skewed way of looking at the benefit of a mortgage, but it figures right into the same scheme as the elimination of credit card debt and saving for 401(k) s as a valid reason to borrow money against your home.

The mortgage and the resulting interest are great tools, when used by the right folks, in the right situation. For the usual consumer and long-term homeowner, unless you think a better deduction on your tax return is worth the forfeiture of equity in your home, you’d better think twice before re-financing with a second mortgage that generates more interest, but less equity.

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