If you are considering a home equity loan for any reason, there are pros and cons to using these loans. One of the advantages of a home equity loan secured by your residence is the interest you pay can be a tax deduction for your. Second mortgages and home equity lines of credit are a popular way for homeowners to consolidate debts or make home improvements and repairs. The money can be used for any purpose and still be a tax deduction; however, since you are essentially borrowing from yourself you should put the money to good use.
In order to have 100% of your of your interest be a tax deduction you will need to meet certain criteria for the IRS. In order for your interest to be fully tax deductible you must:
Have less than on million dollars in mortgage debt.
Have your mortgage and home equity loans secured by your primary residence, or a second home.
Use the equity loans to improve, build, or purchase your primary or secondary home.
The IRS has a publication outlining the rules for interest deductions. Refer to IRS publication 936 to learn more about deducting the interest from your home equity loans and mortgage. To learn more about refinancing your mortgage to consolidate home equity loans, register for our free mortgage guidebook: “Five Things You Need to Know Before Refinancing Your Mortgage.”