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Claiming the Mortgage Interest Tax Deduction: 7 Must-Knows for Homeowners

At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.

DISCLAIMER: This article is meant for educational purposes only and is not intended to be construed as financial, tax, or legal advice. HomeLight always encourages you to reach out to an advisor regarding your own situation.

Homeownership comes with many perks, one of the biggest being the mortgage interest tax deduction. According to the U.S. Treasury’s Office of Tax Analysis, this tax break resulted in a decrease of $25.1 billion in tax payments in fiscal year 2019. Loan interest has been deductible since as far back as 1913, so the tax break has been around for more than a century — but confusion can still arise over who’s eligible and whether the deduction is worth taking.

We sifted through the most recent IRS guidance as of 2021 and gathered insights from seasoned tax professionals to get the lowdown on 7 key things every homeowner should know about the mortgage interest tax deduction.

A dollar gained from the mortgage interest tax deduction.
Source: (Ilja Frei / Unsplash)

1. Mortgage interest adds up faster than you might think.

You may find the mortgage interest deduction to be your most valuable tax break as a homeowner — here’s why.

When you get a loan to buy a house, part of your monthly mortgage payment goes toward interest on that loan, and the rest will go toward the principal balance. The amount of interest paid each month will depend on the amount of your mortgage and the interest rate on your loan.

To illustrate, here’s an example of a hypothetical amortization table that breaks down how much goes toward the actual loan amount and how much goes to interest, based on a $315,000 mortgage with a 30-year term and a 3.25% fixed interest rate over one year*:

Payment Principal Interest Balance
January ($1,370.90) ($517.77) ($853.13) $314,482.23
February ($1,370.90) ($519.18) ($851.72) $313,963.05
March ($1,370.90) ($520.58) ($850.32) $313,442.46
April ($1,370.90) ($521.99) ($848.91) $312,920.47
May ($1,370.90) ($523.41) ($847.49) $312,397.06
June ($1,370.90) ($524.82) ($846.08) $311,872.24
July ($1,370.90) ($526.25) ($844.65) $311,345.99
August ($1,370.90) ($527.67) ($843.23) $310,818.32
September ($1,370.90) ($529.10) ($841.80) $310,289.22
October ($1,370.90) ($530.53) ($840.37) $309,758.69
November ($1,370.90) ($531.97) ($838.93) $309,226.72
December ($1,370.90) ($533.41) ($837.49) $308,693.31

*This example loan amortization schedule was created using Microsoft Office’s loan amortization tool. It is shown for educational purposes only and should not be construed as tax or legal advice. It is also not intended to illustrate available APRs or mortgage-related marketing under the Truth-in-Lending Act Section 1026.24.

In the above example, you would end up paying a total of $10,144.12 in interest payments over the course of the year — an average of $845 every month. That’s not chump change, especially when you’re juggling all of the other expenses associated with owning a home.

With the home interest mortgage deduction (HIMD), homeowners have the opportunity to deduct the amount of mortgage interest paid throughout the year from their taxable income, which in turn reduces the amount of tax they will owe. In the above example, if the homeowner’s annual earnings were $85,000, they could deduct the $10,144 paid in mortgage interest, so they would only owe taxes on $74,856 of their income.

Your lending servicer will provide you with a copy of Tax Form 1098 — “Mortgage Interest Statement” — detailing how much you’ve paid in mortgage interest in the relevant tax year. If they don’t send you a paper version, you may be able to download a copy online through your online mortgage portal. You’ll either use this form in the process of computing your taxes owed yourself or send a copy to your tax professional for review.

2. To take advantage of the home mortgage tax deduction, you’ll need to itemize.

When you file your taxes, you have the choice to use the standard deduction or to itemize your deductions. Here’s a review of each route:

  • Standard deduction: Every taxpayer is permitted to deduct a certain dollar amount from their income before the income tax is calculated. This reduces the amount owed to the federal government. (Click here to calculate your standard deduction as of 2020.)
  • Itemized deductions: If you choose to itemize your deductions, you will claim individual expenses that will be subtracted from your taxable income instead of taking the flat standard deduction. Itemized deductions can include medical expenses, real estate taxes, state and local income taxes, charitable contributions, and home mortgage interest. If you want to deduct your mortgage interest, you’ll have to itemize.

Most taxpayers (or their accountants) will run the numbers for both standard and itemized deductions and choose the option that results in the least amount of taxable income. In the example above, if your mortgage interest is right around $10,000 and your standard deduction is $12,400 if single or $24,800 if married, it might make more sense to not itemize, and thus forgo the mortgage interest deduction.

But if you also have other deductions to make, such as for charity donations or using your home for business purposes, it could push the total amount over the standard deduction, which means it would benefit you to itemize.

3. How much you can deduct will depend on when you purchased your home.

You may be able to deduct 100% of your mortgage interest paid in the previous year, or only a portion of it, depending on the size of your mortgage and when you acquired the debt due to the way tax rules have changed. As a mortgage holder, you have one of two types of mortgage debt in the eyes of the IRS:

  • Grandfathered debt: According to the IRS, any mortgage or refinance that was taken out before Oct. 13, 1987 is considered “grandfathered debt,” because the loans were taken out before today’s mortgage interest tax regulations were created. Mortgage interest on grandfathered debt is fully tax-deductible.
  • Home acquisition debt: If you took out a mortgage or refinance after Oct. 13, 1987 and before Dec. 16, 2017, you can deduct interest on up to $1 million of mortgage debt, or up to $500,000 of mortgage debt if single or married filing separately. If you took out a mortgage or refinance after Dec. 15, 2017 you can only deduct mortgage interest on up to the first $750,000 of mortgage debt, or up to $375,000 if single or married filing separately.

What’s with that December 2017 modification? Well, the cap on the amount of interest you can deduct is a reflection of changes made by the Tax Cuts and Jobs Act (TCJA), which was the piece of legislation that lowered the maximum loan balance to $750,000.

It’s been reported that in 2018, after the TCJA took effect, less than half as many U.S. homeowners wrote off their mortgage interest.

Keep in mind, though, that even if you purchased a home as recently as last year and your loan is higher than the cap, you can deduct the interest paid on the first $750,000 of debt per current tax code.

Another important note: The TCJA also excluded home equity loans from interest deductions unless the loan is used to fund home improvements that boost the property’s value, and many itemized deductions were removed or limited.

Keys used after purchasing a home with a mortgage.
Source: (Zan / Unsplash)

4. You can also deduct mortgage points on a purchase or refi.

When you bought your home, you may have paid mortgage points. Paying mortgage points is essentially like paying for interest in advance, which lowers your interest rate for the duration of the loan. Typically, one point costs 1% of your mortgage amount, so if you paid three points on a $300,000 loan, you would have paid $9,000. A portion of that $9,000 can then likely be deducted in full the year that you pay them so long as you meet IRS requirements.

If you refinanced your home to take advantage of record-low interest rates and you paid home mortgage points when you refinanced, the rules change. You’ll likely need to deduct those points paid to refinance over the life of the new mortgage rather than all at once — though there are exceptions for homeowners who’ve used their refinanced mortgage proceeds to improve their existing home, the IRS notes.

5. Used a home equity loan to make improvements? Check to see if you can deduct that, too!

Got a home equity loan or line of credit? Chances are you can deduct the interest you pay on those accounts, but “only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan,” per the IRS.

That means if you used the funds to renovate your kitchen, build an addition, or finish the basement, the interest is deductible — but if you used the money to pay off credit card debt, cover medical bills, or make a repair that doesn’t boost the home’s value, you won’t be eligible for the deduction.

6. Got a houseboat? No problem — you don’t need a traditional single-family home to qualify.

The IRS offers a broad definition for what types of homes qualify for the mortgage interest deduction. The rule isn’t limited to a single-family home — it can be any dwelling on which you hold a mortgage and has “sleeping, cooking, and toilet facilities.” That means a condo, mobile home, house trailer, or even a houseboat will qualify.

What about a second home? As long as you don’t rent it out, that also counts as a qualified home and all mortgage interest is deductible, even if you don’t live there at all. If you own a second home but rent it out for part of the year, the IRS requires you to live there for more than 14 days OR more than 10% of the number of days it is rented, whichever is longer. Otherwise, the home is considered a dedicated rental property and the interest can’t be deducted.

If you own more than one second home, you’ll have to choose one of them as the qualified second home. However, you can choose a different second home each tax year.

Homeowners discussing the mortgage interest tax deduction.
Source: (Cherrydeck / Unsplash)

7. Is it worth it to itemize and deduct mortgage interest? Talk to a tax pro.

Given the changes that took effect with the Tax Cuts and Jobs Act, you may be wondering whether it makes more financial sense to take the higher standard deduction instead of itemizing — and thus forgo the home mortgage interest deduction. If you’re not sure, it’s best to ask your tax professional to run the numbers so you can compare the scenarios and choose the one that’s most beneficial.

Header Image Source: (Andrey_Popov / Shutterstock)