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LendingTree
March, 14, 2011 | 15Comments

Home Mortgage DeductionTax season offers the opportunity for homeowners to benefit from a number of ongoing and temporary tax breaks. Among them is the mortgage interest tax deduction, which has become an ingrained part of our society and viewed by many as making home ownership affordable to the middle class.

This year, the mortgage interest tax deduction is coming under scrutiny as the government looks for ways to cut costs and raise revenue.  Here’s some of what you should know, based on information from the IRS, if you plan to benefit from the mortgage interest tax deduction:

What Types of Home Loans Qualify?

In order to take the mortgage interest tax deduction, you need to make sure you have a qualifying home loan. You can deduct the interest you pay from your taxable income, creating a situation in which your lower income results in paying a lower amount in taxes. Here are the loans that qualify for the mortgage interest tax deduction:

  • First mortgage – the mortgage you use to buy your home.
  • Mortgage on a second home – as long as you don’t rent it out for more than 14 days a year. (This is a general rule that doesn’t always apply; if you rent out your home for income, make sure you double check the tax rules.)
  • Home equity line of credit.
  • Home equity loan.

When you refinance, the rules are a little different. You can only deduct the interest on your original mortgage balance, plus $100,000 on top of that. So, if you have $120,000 left on your mortgage, and you do a cash-out refinance for $250,000, you can only deduct the interest as if it’s a $220,000 home loan (original 120,000 + additional 100,000). In some cases, you might over-deduct when refinancing. Consult a tax professional before you deduct interest after you have refinanced.

How Much Can You Deduct?

If you are married filing jointly, the IRS says you can get a tax deduction on up to $1 million in mortgage debt secured by a first or second home. Single filers can deduct up to $500,000. You can get an exception, though, if you pay cash for your home, and then use a home equity loan.

The mortgage interest tax deduction phases out as your income rises. This means that if you have a higher income, you can’t take the full deduction. Make sure you understand the phase out adjusted gross income, which changes each year, depending on inflation.

Itemizing Your Deductions

In order to take the mortgage interest tax deduction, you must itemize your taxes using schedule A. In some cases, the mortgage interest paid isn’t more than the standard deduction. However, if you are like me, you have other itemized expenses that can help your Schedule A deductions exceed the standard deduction.

Alone, my mortgage interest is not enough to make itemizing worth it. However, when combined with charitable donations and other deductions, my mortgage interest paid resulted in a $10,904.26 reduction of my taxable income. Looking at the 2010 tax table, I see that this deduction, taken on its own, keeps me in a lower tax bracket and saves me right around $1,703 in taxes. If you divide that by 12, it’s the equivalent of saving $141.92 a month on my mortgage. Not too shabby.

The mortgage interest tax deduction can be helpful if you itemize. Remember, though, that your deduction will diminish over time, since the amount you pay in interest decreases as you repay your mortgage.

Photo: Infrogmation via Creative Commons 2.0

Miranda Marquit is a journalistically trained freelance writer and professional blogger. She contributes to several personal finance web sites, writing on topics such as budgeting, home loans and mortgages, and investing.

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Posts by guest bloggers represent their own opinions, and do not necessarily reflect the views of LendingTree/Tree.com.

Planning on buying a house with your partner? Learn more about your options at the LendingTree Smart Borrower Center. Or simply fill out this refinance form or new home loan formand we’ll match you with up to four lenders so you can compare loan offers.

  • Deb

    what are chance of refinancing home if filed bankruptcy in last 2yrs.? Is it even possible? Or are interest rates to high to bother trying?

  • Anna Cearley

    Hi, Deb. I will ask around here to see if someone would be able to take this question. Thanks so much for your comment!
    - Anna Cearley, Social Media Director at LendingTree/Tree.com

  • Susan Babina

    Is it worth refinancing to lower your interest rate less than 1 percent which only nets you a savings of approximately $4000 interest on the loan, adds $6,000 to the new loan and adds 2 years to the original loan, reduces the payment by $159. It does not seem worth while for no more benefit than a $159 reduction in the monthly payment. I was even quoted to pay points of $230 to get 4.5%.

  • Cathy J Ray

    I would like to have the answer to Deb’s question on bankruptcy. I had to file chapter 13 4 1/2 years ago and only have a few months to go to have it all paid. I bought an older house in Setp. of 2005 and got sick in Dec. and almost lost ever thing. I was hopeing I could fix up the house if I could refinance. My mortgage rate is 5.2 should I bother trying?

    Thanks for your time.
    Cathy

  • Anna Cearley

    HI, Cathy. I hope to have an answer for you two by the end of the week on this topic! Thanks for question. Anna

  • Anna Cearley

    Hi, Susan. Hard to say what’s best for one borrower because what’s good for one might be so good for another. As a general rule of thumb refinancing makes more sense the longer you plan on being in the home. You might want to start out reading this article, and I’ll also see about tracking down a lender to see if they can add any thoughts to this! Anna

    http://www.lendingtree.com/mortgage-refinance/advice/refinance-basics/mortgage-refinancing-basics/

    Anna Cearley, Social Media Director for LendingTree/Tree.com

  • Judy G.

    I had a vacation home along with three other couples but the loan was just under me. The other couples could no longer afford the vacation home and pretty much walk away from it….I couldn’t afford it by my self and had to let it go. The home went into foreclosure in June of 2009. I would like to refinance my primary residence but don’t know if I will be able….I have always carried an excellent credit but with the foreclosure, don’t know if the banks will give me a chance to refinance – DO you think I should try OR need to wait longer?

  • Anna Cearley

    HI, Judy. Thanks for asking your question. Let me look into that for you! Anna

  • Anna Cearley

    HI, Judy. Here is a response from JJ Jackson, one of the mortgage bankers at LendingTree Loans:

    This is JJ a Mortgage Banker with Lending Tree, I’m more than happy to address your question. First and foremost continue paying all your obligations on time. Even one 30 day late on a revolving credit card could delay your desire to refinance by an addition year. The guidelines on this issue are quite clear, most borrowers will have to wait 36 months from the date of foreclosure to refinance per FHA\Lender. Conforming guideline (Fannie/Freddie) require you to wait 84 months, but there are exceptions to every rule. With a good letter of explanation you might get an exception (with extenuating circumstances) but it’s on a case by case basis. We here at Lending Tree would be more than happy to review your application and advise. Please don’t hesitate to give me a call (800-487-5308 ext 4742). JJ

  • Anna Cearley

    HI, Susan. Here is a response from Ted May, a mortgage banker at LendingTree Loans:

    ” I don’t think there is a definitive answer to this question. Many people would consider a savings of $159 monthly as a windfall, while others not enough. I think if you were using the $159 to pay off other “higher” interest credit cards that don’t seem to be getting paid, that would be a good thing? If your plans are not to keep the home long term, then the addition of two years is not as important, since most of what you pay the first “many” years is mostly interest anyways; therefore some would rather save the $159 for the next few years until they sell their home. The $6000 in fees they will spend is equity, and at this point fictitious, and since a lot of experts believe that people will lose 3-5% in value in 2011, it may be a smart decision to use the equity to get the lower rate, especially since you are going to lose it anyways? The short answer with the limited info is, there isn’t a short answer, rather a personal decision if this is beneficial for their particular goals, but at the end of the day saving $159 of “real” money that stays in your wallet in this economy, is a great thing for a lot of people!…TED”

    You can reach Ted, or any other LendingTree Loans mortgage bankers at: 800-487-5308

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  • Anna Cearley

    For those who left questions here about bankruptcy and buying a home …here is a news article that quotes one of our lending experts, Chad Smith and that looks at some comparisons between buying a home after going through a foreclosure vs. bankruptcy:

    http://www.msnbc.msn.com/id/41787682/ns/business-personal_finance/

    – Anna Cearley, Social Media Director at LendingTree/Tree.com

  • Anna Cearley

    Hi, Deb and Cathy…In addition to the article I posted earlier on the subject, here is a response from a LendingTree Loans Mortgage Banker to your question regarding bankruptcy affecting refinance:

    “Great question, I am sure that you are not the only one wondering if you are able to qualify for a new mortgage in today’s mortgage environment. Fortunately we are still in an time of extremely low interest rates and I expect there may be options available to you that can save you money.

    While a detailed explanation of the bankruptcy will be required, underwriters are able to look at the “entire picture” in evaluating credit decisions.

    I would encourage you to speak with a licensed Mortgage Banker in your state and submit a complete application. This can be done in as little as 15 minutes and you will have some specific options to evaluate.

    LendingTree Loans has licensed Mortgage Bankers available 7 days a week to discuss your specific situation and help you find the right solution for your individual scenario.”

    - Response from Cisco Gonzalez, LendingTree Loans Mortgage Banker

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