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Home equity loan deductions
Dear Tax Talk:
I currently have a $142,000, 15-year mortgage at 5.5 percent. I am
considering refinancing this with a home equity loan for $150,000
for 10 years at 4.49 percent. (It is being advertised as an "Easy
1-2-3 Refinance.")
I've been reading that you can only deduct interest
up to $100,000 on a home equity loan, which now makes me wonder
if this is really a good idea. Could you let me know if the $100,000
rule is accurate, and if it is, whether or not this is a logical
plan to execute. Thanks.
Blair
Dear Blair:
You're getting confused with the name given to the type
of loan rather than the fact that you're just refinancing your existing
mortgage.
While there is a $100,000 limitation, it applies only
when you borrow $100,000 more than the current mortgage. When you
refinance an existing mortgage, the interest on the new mortgage
is also deductible up to the amount refinanced plus an additional
$100,000 in borrowing.
You're only borrowing $8,000 more than your current
mortgage, so the interest you pay on the equity line will remain
fully deductible. In fact, you could borrow up to $242,000 and still
claim all the interest paid, provided that it doesn't exceed the
value of your home.
Economically, it only makes good sense to refinance
if you plan to stay in your home long enough to recover the loan's
additional costs, such as document stamps, appraisals and other
expenses. Since you're only looking at a one-point difference, this
could be more than a couple of years.
-- Posted: July 30, 2003
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