Dear Dr. Don,
If my first and second home mortgages are completely paid off, can I refinance or take out a new mortgage against my home to purchase an investment rental property? I do not want to pay the inflated rates of a fixed home equity line of credit if at all possible, so are there any other options (other than a variable rate on a HELOC)?
— Michelle Mortgages
Sure, you can take out a first home mortgage against your personal residence and use it as the down payment on the purchase of an investment rental property. For the interest expense on the loan to be tax-deductible, it has to meet the guidelines stated in IRS Publication 936, Home Mortgage Interest Deduction.
Figure A in Publication 936 — “Is My Home Mortgage Interest Fully Deductible?” — will help you to determine the deductibility of mortgage interest on your personal residence. From there, you need to look at any additional financing required to purchase the investment property.
There’s enough going on beyond just the mortgage that I’d recommend consulting with a tax professional before buying this investment property. Making sure you can justify the purchase on a cash-flow basis is an important consideration beyond the home loan decision.
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