Here is an in-depth look at mortgage interest deduction. Read this to learn what qualifies as mortgage interest and insights to maximize this tax incentive
Owning a home in the United States can be expensive. You need to prepare for the initial deposit, closing costs, and other fees. Good thing there are tax benefits such as the mortgage interest deduction that can help lessen the financial burden of being a homeowner. It can assist home buyers by lowering the amount of taxes you need to pay.
In this article, Mortgage Professional America will explain what the mortgage interest deduction is. We will discuss how it works and what qualifies as mortgage interest. To our usual pool of readers, this guide is part of our client education series. If you have clients who are interested in leveraging mortgage interest deduction, share this with them!
What is mortgage interest deduction?
The mortgage interest deduction is a tax incentive for homeowners on the mortgage interest paid on the first $1 million of mortgage debt. Homeowners can deduct interest on the first $750,000 of the mortgage if they purchased their homes after December 15, 2017.
The mortgage interest deduction can help lower your tax bill by cutting your taxable income. This means the amount you paid in mortgage interest during the year may be subtracted from your income. In turn, you owe less in taxes.
This tax incentive allows homeowners to count interest paid on loans for purchasing, building, or improving their main homes against their taxable income. Aside from reducing the amount of taxes you need to pay, you can use this deduction on property loans for second homes.
Watch this video to learn more about mortgage interest deduction in the US:
When mortgage rates are higher, homeowners usually pay more in interest on their home loans. As such, you might be able to deduct a larger amount when you file your taxes. Want to see the current mortgage rates in the US? Bookmark this page and check it daily for the latest updates.
Is the mortgage interest 100% tax deductible?
Yes, you can deduct all the interest you pay on your home mortgage. However, the amount you can deduct depends on:
- when you took out the mortgage
- how much you borrowed
- what you used the loan for
Why is my mortgage interest no longer tax deductible?
You might be claiming for deductions that are expired or invalid. For instance, you can no longer claim for itemized deduction on mortgage insurance premiums since it has already expired.
If you have a mortgage on a home that is not your main or second home, you can only deduct the interest if you use the loan for:
- business
- investments
- other deductible reasons
If not, the interest is considered personal and can't be deducted.
Mortgage interest deduction limit
The mortgage interest deduction limit was signed in 2017, when the Tax Cuts and Jobs Act (TCJA) lowered the limit. This altered the individual income tax and placed a limit on the amount you may deduct from your home equity loan debt.
Prior to the TCJA, the limit for mortgage interest deduction was $1 million. However, the limit dropped to $750,000 in 2022. This means that married couples who are filing together can deduct interest as high as $750,000. The same is true for filers who are single. Married taxpayers who are filing separately can deduct as high as $375,000 each.
What qualifies as mortgage interest?
The following qualifies as deductible mortgage interest:
- interest on the mortgage for your main home
- interest on the mortgage for a second home
- mortgage points you have paid
Let's discuss them one by one:
1. Interest on the mortgage for your main home
Your main home can be any of these:
- house
- condominium
- cooperative
- mobile home
- house trailer
- houseboat
It can also be any similar property that has facilities for sleeping, cooking, and toilet functions. Properties that don’t qualify as your main home are those that lack basic living accommodations.
2. Interest on the mortgage for a second home
You can use the mortgage interest deduction on a mortgage for a property that is not your primary residence. The condition is that your second home must be listed as collateral for the mortgage.
If you rent out your second home, you must use it for more than 14 days or more than 10% of the total days you rent it out—whichever is longer. You can only deduct the interest from one home if you have more than one second home.
3. Mortgage points you have paid
You might have the option to pay mortgage points when you take out a mortgage. This means that you can pay a portion of your home loan interest in advance. Mortgage points usually cost roughly 1% of your mortgage amount and can earn you around 25% off your mortgage rate.
To qualify for the deduction, mortgage points must be paid at closing and directly to the bank or mortgage lender. In some cases, mortgage points can be deducted during the same year that they’re paid.
Claiming mortgage interest deduction
To claim the mortgage interest deduction, you need to itemize your deductions on your tax return. List all your deductible expenses and your mortgage interest on Schedule A of Form 1040. You cannot add this deduction without itemizing.
In January or early February, your bank or mortgage lender will send you a Form 1098, detailing how much you paid in mortgage interest and points during the tax year. Your bank or mortgage lender will also send a copy to the Internal Revenue Service (IRS) to match up what you report on your tax return.
When you itemize, you report the total amount of mortgage interest you paid during the year. You’ll use this form to complete Schedule A.
Itemizing also requires careful record-keeping. Keep all documents related to your mortgage in case you need to verify your deduction later. This includes your home loan agreement and annual statements.
Taking advantage of the mortgage interest deduction
The mortgage interest deduction may be a great way to lower your taxable income, depending on your financial situation. You need to make sure that you are eligible. You must also itemize deductions properly and verify if your properties (or points) qualify.
Keep in mind that not everyone will benefit from this deduction. For example, if you have a small mortgage, the amount of interest you can deduct might not be very large. The same is true if you have already paid off most of your home loan.
Also, if you take out a home equity line of credit (HELOC), you can only deduct the interest if you use the money to buy, build, or improve your home. You cannot use the mortgage interest deduction for personal expenses like vacations or paying off credit cards.
If you need clarifications about this tax incentive, it’s always a good idea to ask a tax professional for advice. You can also ask your mortgage broker for help. You can find some of them on our Best in Mortgage page.
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