Now that you have the basics, let’s talk about mortgage interest. Generally speaking, it is possible for you to deduct the interest that’s charged on any loan that’s used to buy or improve your residence in the calendar year during which it was paid. This works really well for new home buyers, because in the early years, very little of your monthly payment actually goes toward the principal amount owing – the rest is interest. Deductions vary from state to state, but with mortgage interest deductions, you can actually lower your cost of borrowing by nearly one third. If this sounds like a gift in the form of a subsidy to new home buyers, that’s because that’s exactly what it is.
Now, think about the interest that you’re being charged overall. Did you know that you can take a deduction on the interest for an extra hundred thousand of mortgage debt, and you can use that deduction for anything you please? You can do it, but be careful. This is what’s called a home equity loan exception, and it means that you can use the equity in your home to lower the cost of any other debt that you might be carrying. For instance, if your credit cards are maxed out, you’re paying a fortune in interest – around 18 or 19 per cent – none of which is deductible. But if you take out a mortgage, usually at something like prime +1, all that interest is deductible. You can use your home equity loan to pay off your credit card debt, or any other debt for that matter. This is what’s known as debt-shifting, and it can definitely work to your advantage.
The catch? If you default, you could lose your home. It’s a fabulous break, but tread cautiously.
Now you know about another way that the loan on your Grand Junction real estate can work for you. In Part 3, we’ll talk about what happens if you sell your home.