When you refinance a mortgage for a higher amount

June 6, 2008

My wife and I have a $200,000 mortgage on our home and would like to refinance it for $225,000 to pay off some other debts. Will we be able to deduct all the interest on the loan?

My wife and I have a $200,000 mortgage on our home and would like to refinance it for $225,000 to pay off some other debts. Will we be able to deduct all the interest on the loan?

Maybe. The extra $25,000 will be considered home equity debt rather than acquisition debt, since you wouldn't use it to improve your home. Interest on up to $100,000 of home equity debt is deductible, regardless of how you spend the money (as long as you don't use it to buy tax-exempt securities). So assuming that you don't already have more than $75,000 of home equity debt, you'll be able to deduct all the interest. One caveat, however: If there's a chance you're subject to the alternative minimum tax this year, the plan will backfire. In that case, the home equity interest won't be deductible unless you use the cash to improve your home.