Is mortgage interest deductible if the interest is added to the principal instead of paid?

Question

I have a loan that allows me to make a payment that is less than the monthly interest owed. I have never taken this option, but if I did would the interest that is charged but added to the principal instead of actually paid still be deductible on my taxes?

Answer 1

Good, first, NEVER pay less than the the monthly interest owed, you'll end up in a negative amoritization of your loan, and owe more on your house than it is worth.

However, to answer your question, your interest that is charged is never added to the principal, because the amount of your principal loan will always stay the same, what changes is interest. Interest and principal are not used interchangably, they are different. If you paid only the interest payments on your loan, the principal would NEVER decrease.

That being said, the interest compounds, which is still deductible on your taxes, but if you are not paying it to begin with, how could you deduct it in the first place?

I hate to answer a question, with a question, but I hope you see my point.

-Em

Answer 2

Whatever amount you pay towards interest (not principal) becomes tax deductible. To answer your question, I believe it's tax deductible and would be captured by your lender as such on your 1098.

At the end of the year, you'll receive the 1098 telling you the amount of interest that you paid. You cannot deduct amounts paid towards principal - the tax deduction is for mortgage INTEREST....and your real estate taxes too.

Answer 3

No, only interest that is paid is deductible.

If your lender adds unpaid interest to the principal, you have not paid it, therefore it is not deductible.