Am I looking at mortgage interest deduction on primary home correctly?

[Eddie Torres]

I had question about the mortgage interest deduction on my primary home. I understand that I can deduct mortgage interest up to $750k on my personal residence. Let's say my 1st mortgage balance is $600k and I want to take out a 2nd mortgage for $150k for home improvements which makes the interest on the 2nd deductible as well. Obviously I want the lowest interest rate possible but the way I'm looking at it is that it doesn't make much difference (from a tax standpoint) if the interest rate on that 2nd mortgage is 6% or 9% since the mortgage interest is deductible. Either way, based on my personal taxes, the deduction of that interest ends up being a refund to me every year and gets put back into my pocket. Would you say I'm looking at it correctly? Or am I looking at it wrong?

My questions stems from wanting to take out a 2nd mortgage to build an ADU now while rates or high or keep waiting until rates drop. TIA.

[Michael Plaks]

You are looking at it wrong. Mortgage interest is only deductible if you have more "itemized deductions" than your "standard deduction." No time for a full lesson on this, sorry, but the point is: it does not necessarily reduce your taxes.

If it does, it's not dollar-for-dollar. You may pay $10,000 in interest but you only get back $2,000 back in tax savings. $2,000 is just a random number, the exact number depends on your overall tax situation.

Building an ADU if you plan to rent it is business interest, not personal interest. It gets deducted under different rules, but it still may not reduce your taxes. These rules are also very complicated.

Finally and most importantly: don't make business decisions based on taxes. Wrong mindset. Think whether this ADU makes sense financially for you, and should you also get tax benefits, then it's a nice bonus. But not the reason to do it.