Why Lower Interest is NOT Always Better

Those in the market for a home loan will always look to get the lowest interest that they can. After all, the higher the interest, the more you have to pay, and that is what makes paying the loan back so much harder. So can there ever be a time when lower interest is not better than high interest?

Yes, but it depends on your financial circumstances. It’s always good to be able to claim a tax deduction, and the interest you pay on the loan for your first and second homes can be claimed off your tax. There are certain rules of course. Interest paid on the first $100,000 is tax deductible. Once that limit is reached, other rules apply, depending on what the loan was used for. If it was used for improvements to the first or second home, or to purchase a second home then the limit can go to $1 million - or to the value of the home.

So if you have managed to find a very low interest loan, it could be that you are not saving as much as you thought. But to find out for sure, and if you want to make that tax deduction, it’s a wise move to consult with a tax advisor. You don’t want to get in trouble for inadvertently doing the wrong thing.

It sometimes happens that you have to prepay some of the interest. This happens if you close the deal through the month, rather than on the 1st of the month, which is when most lenders want their mortgage payment to be due. So don’t forget that prepaid interest is also tax deductible.

To claim these deductions you need to itemize them on your tax return. Since all the rules and regulations are confusing to say the least, it’s wiser to get a certified public accountant to handle it all for you.

Other fees such as the loan origination fee are also tax deductible. While this particular fee is actually a percentage of the loan amount, it is mostly expressed as ‘points’. It is helpful for you to have it converted to a dollar amount so you can better understand how much it is, but for it to be tax deductible, it must be written down as points, e.g. 1 point or 2 points. Any discount points are also tax deductible.

This is the eighth podcast of our series on getting the best home mortgage.