Are There Income Tax Benefits to Getting a Second Mortgage Payment?
UPDATED: June 19, 2018
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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 $750,000, under the Tax Cuts and Jobs Act of 2017. (The $750,000 dollar cap applies to purchases of a new home or a second home taken after December 15, 2017 through 2025. If your home loan was taken before December 15, 2017, or under a binding contract before December 15, 2017, you can deduct a higher dollar amount of home mortgage interest: up to $1 million of interest and an additional $100,000 of home equity debt.)
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, a boat, 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.
Beginning in 2018 through 2025, the Tax Cuts and Jobs Act of 2017 suspended the tax deduction for interest paid on home equity loans and lines of credit, unless you use the proceeds to buy, build or substantially improve your home that secures the loan. If you use the proceeds of the equity debt to make home improvements, the first mortgage balance plus the HELOC remain deductible so long as the total does not exceed the $750,000 dollar cap. On the other hand, if the HELOC is used to pay off the car loan or for other personal expenses, the interest cannot be deducted at all.
Benefits and Risks of a Second Mortgage
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.