Home Mortgage Interest Deduction

The home mortgage interest deduction is a significant tax benefit for many U.S. homeowners, enabling them to reduce their taxable income by deducting the interest paid on qualifying mortgage loans. Established over a century ago and embedded into the tax code since 1913, this deduction aims to promote homeownership by making borrowing more affordable. The deduction’s rules have evolved, most notably with the Tax Cuts and Jobs Act of 2017, which introduced limits on the amount of mortgage debt eligible for the deduction.

How the Deduction Works

When you take out a mortgage to purchase, build, or substantially improve a home, the interest portion of your monthly payments can be deducted from your taxable income if you itemize your deductions on Schedule A of your federal tax return. This means you pay federal income tax on a smaller amount of income, providing tax savings.

Currently, interest paid on mortgage debt up to $750,000 is deductible for loans taken out after December 15, 2017. Mortgages originating before this date have a higher limit of $1 million. Additionally, interest on home equity loans is deductible only if the funds are used to buy, build, or significantly improve the home securing the loan. Personal use of home equity loan funds does not qualify for this deduction under IRS rules (see IRS Publication 936).

Eligibility and Requirements

To benefit from this deduction, taxpayers must:

• Have a mortgage on a primary or second home that meets IRS qualifications.
• Itemize their deductions instead of claiming the standard deduction, which increased substantially after 2017.
• Ensure the mortgage debt falls within the IRS limits for deductible interest.

If you take the standard deduction, you cannot claim mortgage interest separately. Thus, homeowners with smaller mortgage interest amounts or those without other large itemized deductions may find the standard deduction more advantageous.

Practical Example

Suppose a homeowner paid $12,000 in mortgage interest over the year and files taxes in the 22% federal tax bracket. They could reduce their tax bill by approximately $2,640 (22% of $12,000) through the mortgage interest deduction. This example illustrates how the deduction directly lowers tax liability.

Common Misconceptions

• Only the interest portion of mortgage payments is deductible—not principal repayments, insurance, or other fees.
• The deduction is not available if you do not itemize deductions.
• The deduction limits set by the 2017 tax law affect eligibility, reducing the amount of deductible mortgage debt.

Tips for Homeowners

• Keep your Form 1098 from your lender, which reports the mortgage interest you paid.
• Evaluate annually whether itemizing deductions or taking the standard deduction benefits you more.
• If possible, strategize mortgage payments to reduce interest—but be aware of potential prepayment penalties.
• Consult a tax professional for complex mortgage or tax situations.

Related FinHelp Resources

Learn more about related topics such as Mortgage Refinancing, Mortgage Planning, and the difference between Principal and Interest (P+I).

Summary Table: Home Mortgage Interest Deduction at a Glance

FAQs

Can I deduct interest on a second home?
Yes. Interest on a mortgage for a second home is deductible if it meets IRS criteria and loan limits.

What if I refinance my mortgage?
Refinanced mortgages generally qualify under the same rules, but deductible debt limits remain in place.

Is home equity loan interest deductible?
Only if the loan proceeds were used to buy, build, or significantly improve the home securing the loan.

For detailed guidance, see the IRS Topic No. 505 and IRS Publication 936. Understanding these rules helps homeowners maximize tax benefits legally and effectively.