Home mortgage interest is any interest that is paid on a loan that is secured by the home itself, which also includes a second home. This means that the mortgage loan is financially backed by the home as collateral. Home equity loans, while secured by the home, need to be used to buy, build, or substantially improve the home in order to be deductible.
The first steps in determining whether or not you can deduct mortgage interest are if you file a Form 1040 and report itemized deductions on Schedule A and you also must have an ownership interest in the qualified home. If you meet both of these qualifications, then you will be able to deduct the interest paid on the mortgage loan.
However, the amount of interest that can be deducted may be limited. For mortgage interest to be fully deductible, all mortgages must fit into one of the following categories at all times during the year:
The mortgage interest deduction will be limited if the amounts exceed the figures above. Also, for the second and third categories, the limits apply to the combined mortgages on your main home and second home.
Points are certain charges that are paid by a borrower in order to obtain a mortgage. It can be possible to deduct the full amount of points in the year paid; however, they are generally deducted ratably over the term of the mortgage. In order to determine the proper treatment there is a test to apply to the terms of the loan and the points paid. The loan on which the points are paid must be used to buy, build, or substantially improve the home.