How much of your home equity loan interest is tax deductible?

To find out how much of your home equity loan is tax deductible, you must look the amount of money that you borrowed and the purpose for borrowing it.

As with all other financial products, before you start counting the savings from using a home equity loan to finance any type of debt, you must take a complete look at your financial picture, IRS schedules and deductions rules, and consult your tax advisor to make sure that you are getting your legal deductions and not paying back more than is needed to the IRS.

Currently, you can deduct the interest on the first $100,000 that you borrow on a home equity loan. This money can be used to finance cars, education expenses, credit card debt, home improvements, home repairs and more.

All of these items if done separately would carry their own varied interest rate. In addition, the interest on some of the items would not be tax deductible. If you wrap them up all under the $100,000 home equity loan, you can usually get a low interest rate and get to deduct the interest payments on your annual tax returns.

However, if you start getting to a point where the amount of your first mortgage and your home equity loan are more than the current value of your property, you won’t be able to deduct all of your interest payments. This means that if you get a home equity loan using one of those 125 percent LTV programs, you can lose big time.

You will now owe more than your home is worth; have no ability to get another home equity loan or home equity line of credit until you pay down the excess amount and start building up new equity, and the interest payment on the excess amount is not eligible for any tax deductions.

If you are in this position, try to pay down the debt as quickly as possible. You don’t want to lose out on any tax deductions, but you also don’t want to lose the financial cushion against emergencies and high interest debt that can get form a home equity loan or home equity line of credit.