Are Second Mortgages Still a Good Idea?

If you’ve been looking into a second mortgage, there’s a good chance you’ve received outdated advice. That’s because the tax changes effective beginning in 2018 eliminate some deductions for second mortgage interest and make second mortgages less attractive in some situations.

What Changed?

Under the previous tax law, most interest on second mortgages, home equity loans and home equity lines of credit was tax-deductible. Beginning in 2018, you can only deduct interest if the loan is for one of the following purposes:

• Buy a home or second home if the loan is secured by that home. That is, if you buy a second home, a mortgage on that home is deductible, but a second mortgage on your first home not secured by the second home is not deductible.
• Build a home with the same restrictions as above.
• Substantially improve your home.

What’s Not Deductible?

You can no longer claim an interest deduction for other common reasons for taking out a second mortgage, such as debt consolidation, financing a startup business or paying for a major vacation. If you decide to use a second mortgage for one of these purposes, your cost of borrowing will increase by your marginal tax rate.

If you were on the fence about whether a second mortgage was a good idea last year, it may no longer be a good idea. However, for something like high-interest debt, a second mortgage can still make sense as long as you’re sure you can pay it off.

What Are the Limits?

You can only deduct interest on the first $750,000 borrowed. That can either be a single loan or multiple loans combined. Above that amount, there is no deduction regardless of the reason for the loan.

What Are Substantial Improvements?

A substantial improvement does one of three things:

• Adds value to your home (increases its potential selling price)
• Prolongs your home’s useful life
• Adapts your home to new uses

For example, you can deduct second mortgage interest if you’re adding a room or renovating to make your home handicap accessible. However, things like routine painting, repairs and appliance replacements probably won’t qualify. Keep an eye on this area, though, because with the new rules, tax professionals will be likely to test the boundaries, and the IRS will probably issue new guidance.

So Is a Second Mortgage Still a Good Idea?

A second mortgage can still be a good idea as long as you’re aware that the current tax code can make them more expensive than in the past. To discuss your specific situation, schedule an appointment with us here at Anson Analytics.  We’d be happy to help you navigate this decision.