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The Home Mortgage Interest Deduction: What It Is and How It Works

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The home mortgage interest deduction, which allows you to deduct the interest you pay on your mortgage from your taxable income, can add up to significant savings at tax time. It’s just one of the perks of homeownership, but it doesn’t apply to everyone with a mortgage — and the savings offered won’t always be significant. We’ll cover everything you need to know about who qualifies and how to calculate how much you can save.

What is the home mortgage interest deduction?

The home mortgage interest deduction is a rule that allows homeowners to deduct the interest paid on a home loan in a given tax year, lowering their total taxable income. Taxpayers can deduct the interest paid on mortgages secured by their primary residence (and a second home, if applicable) for loans used to buy, build or substantially improve the property.

In most cases, the deduction applies to interest paid only up to a certain maximum amount, which is based on when you took out your loan and whether you are filing with a spouse.

What’s deductible: Loans and expenses that qualify

Mortgages used to buy a primary home or second home, including refinanced mortgages

Important rules and exceptions:

  • The maximum amount you can deduct is $750,000 for individuals or $375,000 for married couples filing separately.
  • If you took out your home loan before Dec. 16, 2017, the maximum you can deduct goes up to $1 million for individuals and $500,000 for married couples filing separately.
  • If your loan is from before Oct. 14, 1987 it’s considered “grandfathered” debt and is subject to no limits nor rules about how the funds were used.

Mortgages used to build or improve your primary home or a second home.

Exceptions: If you used the loan to repair rather than improve your home, it’s not deductible.

Home equity debt on a primary home or second home.

Exceptions: The interest paid on home equity loans, home equity lines of credit (HELOCs) and the cash portion of cash-out refinances aren’t deductible if the funds were used for anything other than buying, building or substantially renovating your home.

Other types of deductible interest

The interest portion of your monthly mortgage payment isn’t the only type of interest you’re permitted to deduct from your annual tax bill. You can also deduct:

Mortgage points, or prepaid interest, paid at closing

Mortgage insurance premiums, including private mortgage insurance, insurance on FHA and USDA loans and the VA funding fee.

Late payment charges that aren’t associated with a specific loan service

Prepayment penalties assessed for paying your mortgage off early

Interest paid through participation in the Hardest Hit Fund or Emergency Homeowners Loan programs

Should I deduct my mortgage interest?

The key thing to understand about the home mortgage interest deduction is that it only applies if you are itemizing your deductions — and for most people, it doesn’t make financial sense to do so. Most homeowners will save more money at tax time by taking the standard deduction instead of itemizing.

Keep your total interest amount in mind and compare it to the standard deduction for your taxpayer filing status. For example, the standard deduction amounts in 2022 are $12,950 for individuals, $25,900 for married couples and $19,400 for unmarried heads of households.

Suppose the interest you paid in the previous year is higher than your standard deduction amount. In that case, you could save money by itemizing each of the deductions you qualify for, including the mortgage interest tax deduction. Consult a tax professional for additional guidance.

Things You Should Know

The Tax Cuts and Jobs Act was instituted in 2017 and virtually doubled the standard deduction for most taxpayers. Since then, the amount of Americans itemizing and utilizing the home mortgage interest deduction has plummeted. In the year immediately following the passage of the Act, the number of taxpayers who used the mortgage interest tax deduction fell by 40%.

How is mortgage interest calculated?

It’s certainly easiest to use a mortgage payment calculator to work out your mortgage interest, but if you’d like to calculate it by hand, here’s the formula:

The mortgage interest deduction doesn’t allow you to reduce how much you’ll pay in taxes by the exact dollar amount you paid in mortgage interest — it doesn’t work “dollar-for-dollar” the way a mortgage tax credit does. Instead, you’ll reduce your tax bill indirectly by reducing your taxable income. Schedule A of IRS tax form 1040 guides you step by step through the calculations you’ll need to determine how much mortgage interest you can deduct.

How to claim the home mortgage interest deduction

Wait for your tax form(s) 
Your mortgage lender will send you a form, called Form 1098, that details the amount of mortgage interest you paid over the year. Review the amount of interest listed as paid in Box 1. If you paid less than $600 in interest, your lender isn’t required to send you this document. Otherwise, you should receive a separate 1098 for each loan you’re still paying off.

Determine whether to itemize 
Compare the standard deduction amount to your total deductible mortgage interest, plus other deductions. This will help you determine whether it makes sense to take the standard deduction or itemize your deductions. If your total itemized deduction exceeds the standard deduction amount for your tax filing status, you will save money by itemizing deductions.

Claim your deductions 
If the total amount of your itemized deductions is higher than your standard deduction amount, you’ll likely want to claim the mortgage interest deduction and any other deductions you qualify for. To do this, you’ll need to fill out Schedule A of form 1040 and include it in your tax return.

Frequently asked questions

This depends on when you secured your loan, but in most cases, the limit is $750,000 for individuals and $375,000 for married couples filing separately. For loans originated before Dec.16, 2017, the limit is $1 million for individuals or $500,000 for married couples filing separately. Loans from before Oct. 14, 1987 are not subject to a limit.

Anyone who owns a home, or who is filing jointly with a spouse who owns a home, can choose to take the mortgage interest deduction. Most home types qualify, including condos, mobile homes and houseboats.

A second home you don’t rent to anyone qualifies for the home mortgage interest deduction. Rental property, on the other hand, doesn’t. Whether a second home you rent out for only part of the year will or won’t be considered “rental property” depends on how many days you rent it out. If you use your second home for less than 14 days a year or less than 10% of the days you rented it, it is considered rental property and will not qualify for the home mortgage interest deduction.

Yes, any points paid on a refinance are tax-deductible, with one big caveat: you must divide the points across all of the payments you will make over the life of the loan. You can only deduct the amount that falls in the tax year you’re filing for.

 

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