How To Make Your Debt Payments Tax Deductible

How would you like to have the government help you with your debt payments? Sounds good doesn't it? Well, if you own a house, and you have equity in that house, then you just may be able to turn your monthly debt obligations into a tax deduction.

(Don't own your own home? No problem. Check out your other debt relief options which I outline in this article.)

Now, the first thing that I should clarify is that only the interest portion of your debt payments will be tax deductible. But I wouldn't worry about that too much, as the majority of your payments will likely be interest anyway (at least in the beginning). But I'm getting ahead of myself here, so let's take a step back and see how this debt reduction strategy works.

The main goal of this strategy is to transfer as much of your debt that you are paying 'non-tax deductible' interest on (credit cards, car loans, personal loans) to a loan secured by your home, where the interest may be tax deductible. (You have probably noticed that I keep saying the interest may be tax deductible. There are certain restrictions when it comes to interest payments and tax deductibility so check with your accountant first.) Once the debt is secured by your home, the interest you pay towards that loan will likely be tax deductible. Which means that you will get a tax refund at the end of the year to put towards paying down your debt. In other words, the government chips in to help you pay down your debts!

There are two basic ways to get cash-out of your home equity in order to pay off your existing debts.

Home Equity Loans And Mortgages

The first way is to take out a new loan that is in addition to your first mortgage. These loans are usually called home equity loans, home equity lines of credit or second mortgages. You would simply take out a new home loan and use the proceeds to pay off your other debts.

Cash Out Mortgage Refinance

Your second option would be to do a cash out mortgage refinance. In this scenario you would get a new first mortgage for an amount greater than your existing first mortgage, pay off the existing mortgage, and then use the left over cash to pay off your other debts.

An added bonus of this debt reduction method is that not only will the interest portion of your debt payments on your debt consolidation home loan be tax deductible, the interest rate on the new loan/mortgage could be considerably less than what you are paying now. With many credit card interest rates at 19% or higher, reducing that rate to say 6% will also have a huge impact on just how fast you get out of debt.

Now, I should warn you that borrowing against your home to pay off consumer debts like credit cards can be a slippery slope. The last thing you want is to turn around and run up a bunch of debt on your credit cards once you have paid them off. So unless you have your debt payments under control already, and you are just looking for a way to get out of debt faster and cheaper, I would consider other more appropriate debt relief options before this one.