How amortization changes what you can deduct

Amortization is the process lenders use to split every mortgage payment into two parts: interest (the cost of borrowing) and principal (the portion that reduces the loan balance). That split shifts over time — early payments are interest-heavy, later payments are principal-heavy — and the interest portion is what’s potentially deductible on your federal return. The practical result: two homeowners with identical loan amounts and rates could report very different deductible interest amounts in a given year depending on where they are in the amortization schedule.

In my 15 years advising clients, I routinely review amortization schedules to estimate tax-year interest and to decide whether refinancing or other changes will produce better after-tax outcomes.

(Authoritative guidance: See IRS Publication 936 for rules on home mortgage interest and Form 1098 reporting requirements.)

Why the difference between interest and principal matters for taxes

Only interest paid on qualified mortgage debt is potentially deductible, and that interest is determined by the lender’s amortization for the calendar year. Important tax points to remember:

  • To deduct mortgage interest you must itemize deductions on Schedule A of Form 1040 (unless other tax law changes apply to your situation).
  • Loan limits apply: for most acquisition mortgages originated after Dec. 15, 2017, interest is deductible on up to $750,000 of mortgage debt for married filing jointly (or $375,000 for married filing separately). Older loans may be grandfathered to a $1 million limit. (IRS Publication 936.)
  • Home equity loan interest is deductible only when the loan proceeds are used to buy, build, or substantially improve the home that secures the loan and the debt falls within the applicable mortgage limit.

Always check the IRS guidance for the tax year you’re filing. (IRS, Publication 936.)

How amortization schedules are created and how they change deductible interest

An amortization schedule is a table that shows each periodic payment, the interest portion, the principal portion, and the remaining balance. A standard fixed-rate, level-payment mortgage has an amortization schedule where the interest portion declines while the principal portion increases — but the total monthly payment remains constant.

Example (rounded): a $300,000, 30-year fixed mortgage at 4.0% has a monthly payment of about $1,432. In the first year you may pay roughly $11,400–$11,700 in interest (the exact figure depends on precise loan dates and rounding). That amount is the maximum mortgage interest you could deduct for that tax year (subject to limits and whether you itemize). By year 10 the annual interest amount will be lower because more of each payment goes to principal.

Because the deductible portion is based on actual interest paid during the calendar year, timing matters. Making an extra principal payment in December, for example, reduces interest paid that year and therefore reduces the potential deduction for that tax year — while lowering future interest payments.

How refinancing, recasting and loan structure affect deductible interest

  • Refinancing: When you refinance, you get a new amortization schedule. Points paid to refinance may be deductible over the life of the loan (or amortized according to IRS rules) rather than all at once. If you roll closing costs into the loan, that increases principal and changes future interest and deductible amounts. See our guide on refinancing mortgages for tax considerations (Refinancing Mortgages to Tap Home Equity: Pros, Costs and Tax Considerations: https://finhelp.io/glossary/refinancing-mortgages-to-tap-home-equity-pros-costs-and-tax-considerations/).

  • Recasting: Recasting (making a lump-sum principal payment and having the lender re-amortize the loan) reduces future interest payments without the cost and paperwork of a refinance. Recasting changes the amortization schedule immediately and lowers the interest deductible in subsequent years. Learn more about recasting here: How to Recast a Mortgage: Cost, Benefits, and Eligibility: https://finhelp.io/glossary/how-to-recast-a-mortgage-cost-benefits-and-eligibility/.

  • Adjustable-rate mortgages (ARMs): An ARM’s amortization can change when rates reset; interest may spike or fall depending on rate caps and index changes, altering deductible interest from year to year. If you’re considering an ARM, review the reset schedule and caps carefully (see our ARMs primer: Adjustable-Rate Mortgages: Caps, Reset Dates and Risk Management: https://finhelp.io/glossary/adjustable-rate-mortgages-caps-reset-dates-and-risk-management/).

Interaction with the standard deduction and itemizing decisions

Because the 2017 Tax Cuts and Jobs Act nearly doubled the standard deduction, fewer taxpayers itemize. That means high mortgage interest early in a mortgage no longer guarantees a tax benefit if the total itemized deductions (state taxes, charitable gifts, medical, mortgage interest, etc.) don’t exceed the standard deduction.

Action steps I use in client work:

  • Project itemized deductions for the year, including mortgage interest from the amortization schedule.
  • Compare the total to the standard deduction to determine whether claiming mortgage interest creates tax benefit.
  • Consider timing: deferring or accelerating deductible payments (when legal and prudent) to bunch itemized deductions into years where they will exceed the standard deduction.

Form 1098, recordkeeping and claiming the deduction

Lenders send Form 1098 (Mortgage Interest Statement) showing interest you paid during the year. Use the Form 1098 amounts when completing Schedule A — but also keep your own amortization schedule and bank records in case of questions or discrepancies.

Recordkeeping tips:

  • Save Form 1098 and year-end mortgage statements.
  • Keep documentation for points, closing costs, and any funds used for home improvements financed with the debt.
  • Track any lump-sum principal payments or escrow adjustments that affect interest calculations.

IRS Publication 936 explains reporting rules and limitations; review it before filing. (See: https://www.irs.gov/publications/p936.)

Practical examples and calculations

Illustrative example (approximate):

  • Loan: $300,000, 30-year fixed, 4.00% annual interest.
  • Monthly payment: about $1,432.
  • Year 1 interest: roughly $11,500.
  • Year 5 interest: lower (approx $10,800 depending on timing of payments).

If you make a $5,000 extra principal payment in December of Year 1, Year 1 interest will fall slightly, lowering the deductible amount for that year but saving interest in every subsequent year. The tax trade-off depends on whether you are itemizing and the marginal tax rate. Run the numbers before deciding.

Example planning question I often model for clients: will refinancing to a lower rate but extending the amortization back to 30 years increase deductible interest in the near term and lower cash payments? The answer varies — sometimes a shorter-term refinance increases monthly payments and reduces total interest (and therefore reduces deductions), while delivering more after-tax interest savings because you pay less total interest.

Common misconceptions

  • Misconception: “I can deduct all interest I pay.” Reality: Only qualified mortgage interest on eligible debt (subject to limits) is deductible and only if you itemize.
  • Misconception: “Principal payments reduce taxes.” Reality: Principal reduces loan balance but is not deductible; paying principal reduces future interest and thus future deductions.
  • Misconception: “Refinancing always increases deductions.” Reality: Refinancing changes interest in complicated ways — it can increase or decrease near-term deductible interest depending on loan balance, rate, and term.

Practical strategies (not a substitute for personalized advice)

  • Run amortization projections before making large principal prepayments to see the tax-year impact on deductible interest.
  • If you expect to itemize in only some years, consider timing deductible expenses (bunching charitable gifts or medical costs) rather than manipulating mortgage payments solely for tax reasons.
  • Use refinance and recast calculators and discuss with your lender whether points are deductible immediately or must be amortized.
  • Work with a tax professional to evaluate whether an interest reduction (from prepayment, recast, or refinance) is worth the loss of a near-term deduction.

When to talk to a tax or mortgage pro

Contact a CPA or qualified tax advisor if you:

  • Are unsure whether you should itemize for the tax year.
  • Plan to refinance, recast, or make significant principal prepayments.
  • Need help allocating points and loan fees on your tax return.

If you are comparing refinance versus recast, our refinancing and recast guides can help you understand the trade-offs:

Final takeaways

Amortization dictates which portion of your mortgage payment is interest — and only that interest is potentially deductible. Understanding and reviewing your amortization schedule allows you to: estimate your annual deduction, plan prepayments or refinancing with an eye to tax consequences, and preserve documentation for Schedule A. For specific tax planning tailored to your situation, consult a qualified tax professional.

Professional disclaimer: This article is educational and does not constitute tax or legal advice. For personalized guidance, consult a licensed CPA or tax advisor.

Authoritative sources and further reading