{"id":22765,"date":"2021-03-29T11:40:54","date_gmt":"2021-03-29T18:40:54","guid":{"rendered":"https:\/\/www.homelight.com\/blog\/?p=22765"},"modified":"2024-10-24T09:30:05","modified_gmt":"2024-10-24T16:30:05","slug":"mortgage-interest-tax-deduction","status":"publish","type":"post","link":"https:\/\/www.homelight.com\/blog\/mortgage-interest-tax-deduction\/","title":{"rendered":"Claiming the Mortgage Interest Tax Deduction: 7 Must-Knows for Homeowners"},"content":{"rendered":"

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.<\/i><\/p>\n

Homeownership comes with many perks, one of the biggest being the mortgage interest tax deduction<\/a>. According to the U.S. Treasury\u2019s Office of Tax Analysis<\/a>, this tax break resulted in a decrease of $25.1 billion<\/a> in tax payments in fiscal year 2019. Loan interest has been deductible since as far back as 1913<\/a>, so the tax break has been around for more than a century \u2014 but confusion can still arise over who\u2019s eligible and whether the deduction is worth taking.<\/p>\n

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.<\/p>\n

\"A<\/a>
<\/a> Source: (Ilja Frei \/ Unsplash)<\/figcaption><\/figure>\n

1. Mortgage interest adds up faster than you might think.<\/h2>\n

You may find the mortgage interest deduction to be your most valuable tax break as a homeowner \u2014 here\u2019s why.<\/p>\n

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.<\/p>\n

To illustrate, here\u2019s 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*:<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
<\/td>\nPayment<\/b><\/td>\nPrincipal<\/b><\/td>\nInterest<\/b><\/td>\nBalance<\/b><\/td>\n<\/tr>\n
January<\/td>\n($1,370.90)<\/span><\/td>\n($517.77)<\/span><\/td>\n($853.13)<\/span><\/td>\n$314,482.23<\/td>\n<\/tr>\n
February<\/td>\n($1,370.90)<\/span><\/td>\n($519.18)<\/span><\/td>\n($851.72)<\/span><\/td>\n$313,963.05<\/td>\n<\/tr>\n
March<\/td>\n($1,370.90)<\/span><\/td>\n($520.58)<\/span><\/td>\n($850.32)<\/span><\/td>\n$313,442.46<\/td>\n<\/tr>\n
April<\/td>\n($1,370.90)<\/span><\/td>\n($521.99)<\/span><\/td>\n($848.91)<\/span><\/td>\n$312,920.47<\/td>\n<\/tr>\n
May<\/td>\n($1,370.90)<\/span><\/td>\n($523.41)<\/span><\/td>\n($847.49)<\/span><\/td>\n$312,397.06<\/td>\n<\/tr>\n
June<\/td>\n($1,370.90)<\/span><\/td>\n($524.82)<\/span><\/td>\n($846.08)<\/span><\/td>\n$311,872.24<\/td>\n<\/tr>\n
July<\/td>\n($1,370.90)<\/span><\/td>\n($526.25)<\/span><\/td>\n($844.65)<\/span><\/td>\n$311,345.99<\/td>\n<\/tr>\n
August<\/td>\n($1,370.90)<\/span><\/td>\n($527.67)<\/span><\/td>\n($843.23)<\/span><\/td>\n$310,818.32<\/td>\n<\/tr>\n
September<\/td>\n($1,370.90)<\/span><\/td>\n($529.10)<\/span><\/td>\n($841.80)<\/span><\/td>\n$310,289.22<\/td>\n<\/tr>\n
October<\/td>\n($1,370.90)<\/span><\/td>\n($530.53)<\/span><\/td>\n($840.37)<\/span><\/td>\n$309,758.69<\/td>\n<\/tr>\n
November<\/td>\n($1,370.90)<\/span><\/td>\n($531.97)<\/span><\/td>\n($838.93)<\/span><\/td>\n$309,226.72<\/td>\n<\/tr>\n
December<\/td>\n($1,370.90)<\/span><\/td>\n($533.41)<\/span><\/td>\n($837.49)<\/span><\/td>\n$308,693.31<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

*This example loan amortization schedule was created using Microsoft Office\u2019s 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.<\/i><\/p>\n

In the above example, you would end up paying a total of $10,144.12 <\/b>in interest payments over the course of the year \u2014 an average of $845 every month. That\u2019s not chump change, especially when you\u2019re juggling all of the other expenses associated with owning a home.<\/p>\n

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\u2019s 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.<\/p>\n

Your lending servicer will provide you with a copy of Tax Form 1098 \u2014 \u201cMortgage Interest Statement\u201d<\/a> \u2014 detailing how much you\u2019ve paid in mortgage interest in the relevant tax year. If they don\u2019t send you a paper version, you may be able to download a copy online through your online mortgage portal. You\u2019ll either use this form in the process of computing your taxes owed yourself or send a copy to your tax professional for review.<\/p>\n

2. To take advantage of the home mortgage tax deduction, you\u2019ll need to itemize.<\/h2>\n

When you file your taxes, you have the choice to use the standard deduction or to itemize your deductions. Here\u2019s a review of each route:<\/p>\n