Second mortgages on the same property generally do not carry any special income tax benefits. However, if you get a second mortgage on a new property, you will generally be allowed to deduct the interest on both your first and second home, as long as the loan total is less than $1.1 million.
What is a Second Mortgage?
When most people refer to a second mortgage, they are talking about an additional mortgage on a house or other property where the original mortgage is still in effect. In these situations, the term “second mortgage” simply refers to the loan’s priority in getting paid if you were to default. This means that if your home is foreclosed and sold to pay off the loans, then the proceeds will go toward paying the original mortgage before the second mortgage is paid.
When Do People Get Second Mortgages?
Many people take out a second mortgage in order to pay for expenditures that are difficult to cover with other means of payment (e.g. – credit cards). A new car, add-ons to a home or other home improvement projects, and college tuition are just a few examples. Some people also use second mortgages to consolidate other, more expensive debt.
When is Interest from Second Mortgage Payments Deductible?
As a general matter, you can deduct the interest that you paid on second mortgages that were taken out after October 1987. Before this date, the amount of second mortgages that you may have taken out will be factored into your total acquisition indebtedness. "Acquisition indebtedness" refers to debt incurred when acquiring, constructing or substantially improving a qualified residence. This is where the $1.1 million aggregate loan limitation comes into play.
Benefits and Risks of a Second Mortgage
In addition to the second mortgage’s interest rate being tax deductible, there may be other benefits to using a second mortgage. For instance, the interest rate may be lower than the rate for personal loans or credit cards. However, although a second mortgage may be an easy way to borrow a large sum of money, it can be risky, since you are using your home to secure it.
Before moving forward with a second mortgage, be sure you have spoken to a qualified tax professional in your area. S/he will be able to assist you in making the best financial decision for your particular situation.