All About that Tax: Is Home Loan Tax Deductible?
Is home loan tax deductible? Fortunately, the government encourages its citizens to get home loans through tax deductions. It is every citizen’s right after all to acquire homes. Find out more about the tax deductions that you can get when you apply for a home loan by reading this article.
Like any other law, tax deduction on home loans also have limitations. The law limits people from getting tax deductions when the property is deemed to luxurious. For example in America, if you owe $600,000 on your main home and $800,000 on a vacation home, you are not allowed to deduct the interest that you pay that relates to the excess $400,000. In some cases, the excess interest may qualify for a deduction if it relates to a home equity loan.
The tax deduction is also only applicable in a certain type of home: your principal home, the one where you stated your residence. The tax law also does not grant discretion when you choose which residence to treat as the main home. Your main home pertains to the place where you usually stay at.
Fortunately, you can choose any second home to qualify for the deduction. Your second home is only binding for the current tax year. Next year, you can deduct the mortgage interest on a different second home if it provides greater tax savings.
Your home loan lender has a security interest in your home as collateral for repayment of the loan. This security interest allows the bank to remain focused on the title to your home. You may be eligible to deduct your interest payments as long as the mortgage document you sign includes this type of security interest.
Check if your mortgage document states that they will provide that in the event you default on mortgage payments, the bank can foreclose on your home and apply all sale proceeds to the outstanding mortgage balance. However, if you use a credit card to subsidize the purchase these interest payments are not deductible since the credit card company doesn’t have any security interest in your home.
How do they count your tax?
Here are the factors that have to be considered when computing your home loan mortgage:
• Mortgage amount – The original balance of your mortgage.
• Interest rate after taxes – This is your annual interest rate after your taxes has been taken in consideration
• Interest rate – Annual interest rate for your mortgage
• Term – The number of years that you’re going to pay the loan
• Monthly payment – The amount that you’re going to pay for the principal and the interest
• State tax rate – The amount the state wants you to pay
• Discount points – Total number of “points” purchased to reduce your mortgage’s interest rate. Each “point” costs 1% of your loan amount. As long as the points paid are not a broker’s commission, they are considered tax deductible in the year that they were paid.
• To easily know the number of tax that they’re going to deduct, we advise that you use mortgage tax calculator.