Mortgage interest is a major benefit in your life, allowing you to deduct portions of your home loan payments, rather than reduce the purchase price of your home. Whether you’re buying your first house or refinancing an existing one, it’s important to know how mortgage interest works for taxes.
Let’s say you buy a $250,000 home, putting 20% ($50,000) down. The rest is financed through your mortgage lender. $200,000 of your mortgage is on what’s called an “amortized loan” and the remaining $50,000 is on an “interest-only loan.” The interest-only loan means you pay only the interest each month for the first few years, then start paying off the principle amount in addition to the interest as time goes on. Each month, you’ll make a payment that consists of both principle and interest – which is referred to as an amortized loan.
Mortgage interest is the interest you pay on your mortgage. This can be used as an expense for tax deductions and credits. If you pay more than $600 in mortgage interest, you must report it with your taxes.
You can deduct up to $750,000 in mortgage debt from your taxable income if you’re married filing jointly or $375,000 if you’re single. The amount of interest paid on the loan determines how much of that deduction you can get. For example, if you paid $1,200 in mortgage interest for the year, then half of your total deduction would be $500 (half of $1,200). You can also deduct points charged when buying a house as part of this calculation.
What Is a Mortgage Interest Deduction?
The mortgage interest deduction is a common itemized deduction that allows homeowners to deduct the interest they pay on any loan used to build, purchase, or make improvements upon their residence, from taxable income. The mortgage interest deduction can also be taken on loans for second homes and vacation residences with certain limitations.
The amount of deductible mortgage interest is reported each year by the mortgage company on Form 1098.1 This deduction is offered as an incentive for homeowners.
KEY TAKEAWAYS
- The mortgage interest deduction helps homeowners lower the amount of tax owed.
- These deductions are reported on Form 1098 and Schedule A or Schedule E, depending on the type of deduction.
- The Tax Cuts and Jobs Act (TCJA) of 2017 reduced the maximum mortgage principal eligible for the interest deduction to $750,000 (from $1 million).23
- Some homeowners, under legacy clauses, are not subject to the new limits.2
- Many taxpayers forgo claiming the mortgage interest deduction in favor of the larger standard deduction.
How a Mortgage Interest Deduction Works
Introduced along with the income tax in 1913, the mortgage interest tax deduction has since become the favorite tax deduction for millions of U.S. homeowners.
Home mortgage interest is reported on Schedule A of the 1040 tax form. The mortgage interest paid on rental properties is also deductible, but this is reported on Schedule E. Home mortgage interest is quite often the single itemized deduction that allows many taxpayers to itemize; without this deduction, the remaining itemized deductions would not exceed the standard deduction. Interest from home equity loans also qualifies as home mortgage interest.
The Tax Cuts and Jobs Act (TCJA) passed in 2017 changed the deduction. It reduced the maximum mortgage principal eligible for the deductible interest to $750,000 (from $1 million) for new loans (which means homeowners can deduct the interest paid on up to $750,000 in mortgage debt). However, it also nearly doubled standard deductions, making it unnecessary for many taxpayers to itemize.
As a result, most went on to forgo the use of the mortgage interest tax deduction entirely. For the first year following the implementation of the TCJA, an estimated 135.2 million taxpayers were expected to opt for the standard deduction.4
By comparison, in 2022, 18.5 million were expected to itemize, and, of those, 14.2 million would claim the mortgage interest deduction.5 Roughly 75 million mortgages are outstanding in the United States during the summer of 2022, which suggests that the vast majority of homeowners receive no benefit from the mortgage interest deduction.6
Mortgage deductions can also be taken on loans for second homes and vacation residences, but there are limitations.7
Qualifications for a Full Mortgage Interest Deduction
In 2017, the Tax Cuts and Jobs Act (TCJA) limited how much interest homeowners could deduct from taxes. Instead of single or married filing jointly taxpayers deducting mortgage interest on the first $1 million ($500,000 for married filing separately) of their mortgage, they can now only deduct interest on the first $750,000 ($375,000 for married filing separately taxpayers) of their mortgage.2
However, some homeowners can deduct the entirety of their mortgage interest paid, as long as they meet certain requirements. The amount allowed for the deduction is reliant upon the date of the mortgage, the amount of the mortgage, and how the proceeds of that mortgage are used.
As long as the homeowner’s mortgage matches the following criteria throughout the year, all mortgage interest can be deducted. Legacy debt, meaning mortgages taken out by a date set by the Internal Revenue Service (IRS) qualifies for the deduction.
Mortgages issued before Oct. 13, 1987, have no limits. This means, that taxpayers can deduct any mortgage interest amount from taxes. Mortgages issued between Oct. 13, 1987, and December 16, 2017, and homes sold before April 1, 2018, can deduct mortgage interest on the first $1 million ($500,000 for married filing separately taxpayers) of their mortgage. For the latter, the sales contract must have been executed by Dec. 15, 2017, with a closing conducted before April 1, 2018.2
The mortgage interest deduction can only be taken if the homeowner’s mortgage is a secured debt, meaning they have signed a deed of trust, mortgage, or a land contract that makes their ownership in qualified home security for payment of the debt and other stipulations.2
Examples of the Mortgage Interest Deduction
Under the Tax Cuts and Jobs Act of 2017, the mortgage limits for the mortgage interest deduction have decreased. In addition to the mortgage interest deduction change, what can be included as an itemized deduction has changed, disallowing many from claiming what they previously claimed.3 Despite these changes, the mortgage interest deduction can still prove valuable for some taxpayers.
When the Mortgage Interest Deduction Is Beneficial
For example, consider a married couple in the 24% income tax bracket who paid $20,500 in mortgage interest for the previous year. In tax year 2023, they wonder if itemizing deductions would yield a larger tax break than the $27,700 standard deduction.8 If the total of their itemized deductions exceeds the standard deduction, they will receive a larger tax break.
After totaling their qualified itemized deductions, including the mortgage interest, they arrive at $32,750 that can be deducted. Since this is larger than the standard deduction, it offers a greater benefit: $7,860 ($32,750 x 24%) vs. $6,648 ($27,700 x 24%).
When the Mortgage Interest Deduction Is Not Beneficial
A single taxpayer in the same 24% tax bracket also wonders if itemizing taxes would result in a lower tax liability. The taxpayer paid $9,700 in mortgage interest for the previous year and only has $1,500 of deductions that qualify to be itemized. The standard deduction for a single taxpayer for 2023 is $13,850.8 Because the total itemized deductions ($11,200) is less than the standard deduction, it does not benefit the taxpayer to itemize for the tax year.
Essentially, the homeowner receives no benefit for the paid interest, and the mortgage interest deduction goes unclaimed.
Can You Deduct Both Property Taxes and Mortgage Interest?
Homeowners that itemize taxes and meet the qualification for deducting mortgage interest can deduct property taxes and mortgage interest from their taxes.7
Can Co-Owners of a Property Deduct Mortgage Interest?
Co-owners of a property can deduct mortgage interest to the extent that they own the home. For example, if two people own the house equally, each can deduct up to 50% of the mortgage interest from taxes, subject to mortgage interest deduction limits.29
Can You Use the Mortgage Interest Deduction After You Refinance Your Home?
The mortgage interest deduction can be taken after refinancing a home if the refinance is on a primary or secondary residence. The mortgage interest can be deducted if the money was used for a capital home improvement—an improvement that increases the value of the home.
Is mortgage interest tax deductible
What is the mortgage interest deduction?
The mortgage interest deduction is a tax deduction for mortgage interest paid on the first $1 million of mortgage debt. Homeowners who bought houses after Dec. 15, 2017, can deduct interest on the first $750,000 of the mortgage. Claiming the mortgage interest deduction requires itemizing on your tax return.
Here’s a look at how it works and how you can save money at tax time.
How the mortgage interest deduction works in 2022
The mortgage interest deduction allows you to reduce your taxable income by the amount of money you’ve paid in mortgage interest during the year. So if you have a mortgage, keep good records — the interest you’re paying on your home loan could help cut your tax bill.
As noted, in general you can deduct the mortgage interest you paid during the tax year on the first $1 million of your mortgage debt for your primary home or a second home. If you bought the house after Dec. 15, 2017, you can deduct the interest you paid during the year on the first $750,000 of the mortgage.
For example, if you got an $800,000 mortgage to buy a house in 2017, and you paid $25,000 in interest on that loan during 2021, you probably can deduct all $25,000 of that mortgage interest on your tax return. However, if you got an $800,000 mortgage in 2021, that deduction might be a little smaller. That’s because the 2017 Tax Cuts and Jobs Act limited the deduction to the interest on the first $750,000 of a mortgage.
There’s an exception to that Dec. 15, 2017, cutoff: If you entered into a written binding contract before that date to close before Jan. 1, 2018, and you closed on the house before April 1, 2018, the IRS considers your mortgage to be obtained prior to Dec. 16, 2017.
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What qualifies as mortgage interest?
IRS Publication 936 has all the details, but here’s the list in a nutshell.
Interest on a mortgage for your main home
- The property can be a house, co-op, apartment, condo, mobile home, house trailer or a houseboat.
- The home has to be collateral for the loan.
- The home must have sleeping, cooking and toilet facilities to count.
- If you get a nontaxable housing allowance from the military or through the ministry, you can still deduct your home mortgage interest.
- A mortgage that you get in order to “buy out” your ex’s half of the house in a divorce counts.
Interest on a mortgage for your second home
- You don’t have to use the home during the year.
- The house has to be collateral for the loan.
- If you rent out the second home, you have to be there for the longer of at least 14 days or more than 10% of the number of days you rented it out.
Points you paid on your mortgage
- Points are a form of prepaid interest on your loan. You can deduct points little by little over the life of a mortgage, or you can deduct them all at once if you meet every one of eight requirements.
- In general, the eight requirements are that the mortgage has to be for a your main home, paying points is an established practice in your area, the points aren’t unusually high, the points aren’t for closing costs, your down payment is higher than the points, the points are computed as percentage of your loan, the points are on your settlement statement and you use the cash method of accounting when you do your taxes.
Late payment charges on a mortgage payment
- You can deduct a late payment charge if it wasn’t for a specific service performed in connection with your mortgage loan.
Prepayment penalties
- You may face a penalty for paying off your mortgage early, but you may also be able to deduct the penalty as interest.
Interest on a home equity loan
- You have to use the money from the home equity loan to buy, build or “substantially improve” your home.
- If you use the money to buy a car, pay down credit card debt, or pay for something else not home-related, the interest isn’t deductible (learn more about deducting home equity loan interest).
Mortgage insurance premiums
- This includes the amount paid for private mortgage insurance, FHA mortgage insurance premiums, USDA loan guarantee fees and VA funding fees.
- The insurance contract must have been issued after 2006.
- You can’t deduct the cost of mortgage insurance if your adjusted gross income is more than $109,000, or $54,500 if married filing separately, on Form 1040 or 1040-SR, line 8b.
- The amount you can deduct is reduced if your adjusted gross income is more than $100,000 ($50,000 if married filing separately).
What’s not deductible
- Homeowners insurance
- Extra principal payments you make on your mortgage
- Title insurance
- Settlement costs (most of the time)
- Deposits, down payments or earnest money that you forfeited
- Interest accrued on a reverse mortgage
How to claim the mortgage interest deduction
You’ll need to take the following steps.
1. Look in your mailbox for Form 1098. Your mortgage lender sends you a Form 1098 in January or early February. It details how much you paid in mortgage interest and points during the tax year. Your lender sends a copy of that 1098 to the IRS, which will try to match it up to what you report on your tax return.
You will get a 1098 if you paid $600 or more of mortgage interest (including points) during the year to the lender. (Learn more about Form 1098 here.) You may also be able to get year-to-date mortgage interest information from your lender’s monthly bank statements.
2. Keep good records. The good news is that you may be able to deduct mortgage interest in the situations below under certain circumstances:
- You used part of the house as a home office (you may need to fill out a Schedule C and claim even more deductions).
- You were a co-op apartment owner.
- You rented out part of your home.
- The home was a timeshare.
- Part of the house was under construction during the year.
- You used part of the mortgage proceeds to pay down debt, invest in a business or do something unrelated to buying a house.
- Your home was destroyed during the year.
- You were divorced or separated and you or your ex has to pay the mortgage on a home you both own (the interest might actually be deemed alimony).
- You and someone who is not your spouse were liable for and paid mortgage interest on your house
The bad news is that the rules get more complex. Check IRS Publication 936 for the details, or consult a qualified tax pro. Be sure to keep records of the square footage involved, as well as what income and expenses are attributable to certain parts of the house.
3. Itemize on your taxes. You claim the mortgage interest deduction on Schedule A of Form 1040, which means you’ll need to itemize instead of take the standard deduction when you do your taxes.
That can also mean spending more time on tax prep, but if your standard deduction is less than your itemized deductions, you should itemize and save money anyway. If your standard deduction is more than your itemized deductions (including your mortgage interest deduction), take the standard deduction and save yourself some time. (Read more about itemizing versus taking the standard deduction.)
Schedule A allows you to do the math to calculate your deduction. Your tax software can walk you through the steps.
4. See if you qualify for special deduction rules. If you got help from a state housing finance agency “Hardest Hit Fund” program or an Emergency Homeowners’ Loan Program (the state or the Department of Housing and Urban Development administers that), you may be able to deduct all of the payments you made on your mortgage during the year.
How does paying off mortgage affect credit score
Paying off a mortgage can have a huge effect on your credit score. It’s important to understand how this works, because it can make a big difference in your finances.
How? Well, if you pay off your mortgage, that means you no longer have any obligations on that property. That means you’re not obligated to make payments anymore, and it also means that you don’t have any liens or other claims against the property (like an unpaid tax bill). This can affect your credit score in two ways:
1) It will increase your credit utilization ratio. The credit utilization ratio is how much debt you have compared to how much available credit you have available at any given time. If you have $10,000 in total outstanding debt spread across five credit cards with limits of $2,500 each and no other debts at all, then your credit utilization ratio would be 20% ($10k/50k). If one of those cards were paid off entirely and there was no longer any debt on it at all, then that card would completely disappear from the equation—meaning its limit would go away entirely as well—and therefore reduce your overall
What Happens to Your Credit Score if You Pay Off Your Mortgage?
Key points
- Paying off a mortgage is unlikely to cause a huge change to your credit score.
- In some cases, paying off a home loan could actually result in a minor credit score hit.
Carrying a mortgage is something you might easily end up doing for 30 years. Even if you manage to pay off your home early, chances are, you’ll have carried that loan for many years before being done with it. A paid-off mortgage is a milestone worth celebrating. But in some cases, paying off a mortgage could actually cause a minor hit to your credit score.
Why paying off a mortgage could hurt your credit score
You’d think that paying off a loan would reflect positively on your credit score, since it shows you’re no longer borrowing as much. But in some cases, a small hit to your credit score might ensue when your home gets paid off.
That said, the hit in question should be minor in nature. Your credit score might dip around 10 points or so once your mortgage is paid off, but we’re not talking about a massive hit, like the type you’d face if you were to be late with a few mortgage payments.
So why would paying off your home cause your credit score to drop at all? It boils down to the way credit scores are calculated.
There are five factors that go into calculating a credit score:
- Your payment history, which speaks to how timely you are in paying bills
- Your credit utilization ratio, which measures how much of your available revolving credit you’re using at once
- The length of your credit history, which shows how long you’ve had different accounts open
- Your new credit accounts, which shows how many loans and credit cards you’ve applied for recently
- Your credit mix, which shows what types of loans you have
Of these factors, your payment history and credit utilization ratio carry the most weight. Paying off a mortgage could impact the length of your credit history as well as your credit mix.
If you don’t have any long-standing accounts in your name other than your home loan and you pay off your mortgage, which you may have held for decades, that could result in a shorter credit history — and a little bit of credit score damage. Similarly, if paying off your mortgage leaves you with just credit card accounts in your name, that could reflect poorly on your credit mix (since mortgages are a healthy type of debt to have and credit cards aren’t). As such, your score could take a minor hit.
Should you avoid paying off your mortgage early due to credit score concerns?
You may decide not to pay off your home loan early because you have an affordable interest rate on that mortgage and you want to free up your money for other purposes. But if you’re able to pay off your home ahead of schedule and think that’s the right choice for you, don’t let concerns about your credit score stop you.
As mentioned above, any hit to your credit score resulting from a mortgage payoff should be minor. If paying off your mortgage helps you improve your financial situation, it’s a move worth making.
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