Generally, second mortgages on the same property do not carry any special income tax benefits. However, if you get a second mortgage on a new property then under the Tax Cuts and Jobs Act of 2017, you are able to deduct the interest on your first and second home as long as the loan total is less than $750,000. This $750,000 cap applies to a purhase of a new home or a second home which is taken after December 15, 2017, through 2025. If your home loan was taken under a binding contract before December 15, 2017, then 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.)
So what is a second mortgage?
A second mortgage is a loan that uses your home as collateral. Often, a second mortgage is an additional mortgage on a house or other property where the original mortgage is still in effect. In such situations, the term “second mortgage” refers to the loan’s priority. If you were to default (if you foreclose on the home and it is sold to pay off the loans) then the proceeds will go towards paying the original mortgage before the second mortgage is being paid.
When do people get second mortgages?
Most people take out a second mortgage in order to pay for expenditures which are too difficult to cover with other means of payment such as 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 the second mortgages to consolidate other, more expensive debt.
When is the interest on Second Mortgage Payments Deductible?
Usually, you can deduct the interest you paid on second mortgages that were taken out after October 1987. The number of second mortgages taken out before this date will be factored into your total acquisition indebtedness (the debt incurred while acquiring, constructing or substantially improving a qualified residence).
Beginning in the year 2018 through 2025, the Tax Cuts and Jobs Act of 2017 has suspended the tax deduction for the interest paid on the home equity loans and lines of credit, unless you use the proceeds to buy, build, or substantially improve the home which secures the loan. If you use proceeds of the equity debt to make home improvements, then the first mortgage balance plus the HELOC remain deductible, as long as the total doesn’t exceed the $750,000 dollar cap. However, the interest cannot be deducted at all if the HELOC is used to pay off the car loan or other personal expenses.
Advantages of a Second Mortgage
There may be other advantages to using a second mortgage. For example, the interest rate may be lower than the rate of personal loans or credit cards. Nonetheless, a second mortgage may be an easy way to borrow a large sum of money, still, it can be risky since you are using your home to secure it. Ensure you speak to a qualified tax professional in your region before moving forward with a second mortgage as we will be able to assist you to make the best financial decision for your particular situation.
If you are considering taking out a second mortgage and want to prepare financially, contact me today at 615-326-TAX9 for a free consultation.