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Second Mortgage Interest is Deductible Only up to 100% Staff - Mortgage Lenders Plus.com

These days, a second mortgage is synonymous with a home equity loan. Second mortgages are popular for utilizing the cash value of the equity you’ve built up in your home for other purposes. A second mortgage behaves in much the same fashion as a first mortgage, in that there are loan origination costs and an assortment of fees associated with obtaining the loan. If you are using your second mortgage to consolidated debt, it’s important to amortize those closing costs in analyzing the value of your new loan as opposed to your existing debt. And, it’s critical to examine the second mortgage interest.

Most second mortgages are for periods of five, ten or fifteen years – or some figure in between, if it’s important to you. The second mortgage interest will generally be a fixed rate, although these days you can opt for an adjustable rate with some lending institutions. The fixed rate on a second mortgage will be two percentage points or more above the available fixed rate on a primary mortgage to the same borrower.

The IRS allows the same tax deduction on second mortgage interest that it allows on your primary mortgage – up to a maximum of a $100,000 loan. A larger second mortgage will allow you to deduct interest from your taxable income paid only on the maximum allowed.

While most lending institutions will only lend second mortgages that bring the indebtedness on the home to 80% of the home’s value, there are some lenders out there offering loans of up to 125% of the home’s current worth. The risk in a loan of this magnitude is evident, particularly in a housing market that has developed a tremendous amount of inertia over the last year.

Moreover, the second mortgage interest on a loan of this type is deductible only up to 100% of the value of the home. In other words, between your first and second mortgage, you may deduct interest paid on debt equal to the home’s value, but not on interest paid on that extra 25%.

The deductibility of second mortgage interest can sometimes be subject to the use of the funds, particularly with FHA or HUD sponsored home equity loans. If you are using a commercial lender for a private loan, there is no issue over use of the home equity funds. With some government refinance programs however, the money must be put to use improving the home.