Does a mortgage affect my income tax?

All interest paid on a mortgage loan (used to purchase a home) is an itemized deduction for federal income taxes up to a limit of $1 million in loan principal. For a second mortgage, or a refinanced first mortgage, interest is deductible up to a limit of $100,000 over the amount of the loan used to purchase the home. These deductions apply to both first and second homes, and the property value must exceed the debts.

What's the difference between a first and a second mortgage?

A first mortgage gives the lender first claim to the home in the case of default on the loan. After the loan is foreclosed and the home is sold to satisfy the debt of the first mortgage, any sales proceeds left can be claimed by the holder of the second mortgage. Because of this priority, a first mortgage is less risky for the lender than a second mortgage. Consequently, interest rates and terms on first mortgage loans are more favorable to the borrower. In most cases, second mortgage loans are used to take equity out of the home when it is desirable to preserve the existing first mortgage loan.