Saving Money on Your Taxes when Refinancing a Mortgage.
As a homeowner, you should already be aware that your mortgage interest is able to be deducted from your taxes. Also, you are probably aware that interest adds up a lot more in the first years of a mortgage and progressively lowers as you get further into your home loan, and pay some principal down. The more interest you pay, the bigger the tax deduction you will be able to claim. Refinancing your home loan may lower you tax liability. Refinancing a mortgage to pay down high interest debts you have accumulated such as credit card bills, will give you even bigger benefits. This is because you are replacing non tax deductible interest on your credit cards, and replacing it with tax deductible interest on your home loan.

Tax Deductions and Mortgage Refinancing.
The IRS has designated two different types of mortgage debt: home equity debt, and home acquisition debt. Home acquisition debt is the amount you paid to purchase the home. When you refinance a mortgage, whatever amount the new home loan is for, is home acquisition debt. Anything over that amount is considered home equity debt. Here is an example:

-Say a homeowner owes $100,000 on their mortgage.

The homeowner decides to take out a new home loan for $112,500 and pays off her old loan at the same time.

For the reasons of taxes, the $100,000 is considered home acquisition debt, and the $12,500 will be considered home equity debt.

Typically, any interest paid on home acquisition debt is totally tax deductible. You will also be able to deduct interest on the first $100,000 of home equity debt.

If this all sounds a little confusing, do not worry. A tax professional can easily answer all of your questions. Basically though, mortgage refinancing can assist you in managing your tax liability.

-M Petrone

Subscribe via email

Enter your email address:

Delivered by FeedBurner