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The IRS mortgage interest tax deduction can reduce your taxable income by allowing you to write off the interest you pay on your home loan during the tax year:
- If you took out your mortgage before Dec. 16, 2017, and used it to buy, build, or improve your home, you’re able to deduct the mortgage interest you paid on the first $1 million of your mortgage ($500,000 if married filing separately).
- If you took out your mortgage after Dec. 15, 2017, and used it to buy, build, or improve your home, you’re able to deduct the interest paid on the first $750,000 of your mortgage ($375,000 if married filing separately).
Here’s what you should know about qualifying for the mortgage interest deduction and how to deduct it:
- What is the mortgage interest deduction?
- How the mortgage interest deduction works
- What qualifies for a mortgage interest deduction?
- What’s not deductible
- How to claim a mortgage interest deduction
What is the mortgage interest deduction?
The mortgage interest deduction is a tax deduction that allows you to deduct mortgage interest payments from your taxable income each year.
The IRS defines mortgage interest as interest you pay on a loan that’s secured by your main home or second home. Although most homeowners qualify for the mortgage interest deduction, relatively few take advantage of it. That’s because you need to itemize your deductions to qualify, but for most people, the standard deduction results in a bigger tax break.
For example, the standard deduction for tax year 2021 is $12,550 ($25,100 for married joint filers). Itemizing to get the mortgage interest deduction is only a better choice if you pay more than $12,500 ($25,100 for joint filers) in mortgage interest and other deductible expenses during the tax year.
How the mortgage interest deduction works
The mortgage interest deduction reduces your taxable income and also reduces your tax liability, making the deduction an important perk of owning a home.
$8,000 (points) + $16,800 (interest payments) = $24,800 (total interest)
The total interest you paid comes to $24,800. This amount exceeds the standard deduction of $12,500 even without adding in other itemized deductions you might be eligible for, so you might be better off itemizing, but always consult a tax professional about your specific situation.
If you’re not sure how much interest you’ve paid on your mortgage, don’t worry. Your mortgage servicer keeps track of how much interest and mortgage insurance you pay throughout the year.
Assuming you paid more than $600 in interest, points, and mortgage insurance premiums, your servicer will send you IRS Form 1098, the Mortgage Interest Statement, showing how much you paid. Keep this form handy when you work on your tax return.
Find Out: How Much Does It Cost to Buy a Home?
What qualifies for a mortgage interest deduction?
Not all types of mortgage loans qualify for the home mortgage interest deduction, nor do all homes. But you might be surprised by some of the costs you can deduct.
Mortgage interest you pay on your main home
You can deduct mortgage interest you pay on a loan secured by your primary residence. This is the home you live in most of the time. You can only have one main home at any given time.
Mortgage interest you pay on your second home
Mortgage interest you pay on a second home, including a timeshare, is also deductible. You don’t have to spend a particular amount of time there for it to qualify unless you rent it out.
If the second home is rented, you must stay in the house at least 14 days per year or 10% of the number of days the home is rented. If not, the IRS considers it a rental property, and it won’t qualify for the mortgage interest deduction.
Mortgage interest in connection with a home sale
To qualify for the mortgage interest deduction, you must have taken out the mortgage after Oct. 13, 1987, and used it to buy, build, or substantially improve your home. The home must be secured by that loan. You can deduct the interest you paid up to and including the day before you close.
Interest you pay on a home equity loan or line of credit
Because home equity loans and lines of credit are secured by the home, the interest you pay counts as deductible mortgage interest.
You can only deduct interest on the portion of the loan you used to buy, build, or substantially improve the home that secures the loan.
Prepayment penalties
If you pay off your mortgage early and are assessed a prepayment penalty, you may be able to deduct the penalty as home interest.
Late payment charges
Late fees also count as mortgage interest as long as they weren’t for a specific service or cost related to your mortgage loan.
Mortgage points
Mortgage points — also known as prepaid interest — can be included as mortgage interest. You can deduct all eligible points even if the seller paid them on your behalf.
Typically you can’t deduct the full amount of points in a single tax year unless you meet all eight requirements listed in IRS Publication 936. Instead, you’ll generally deduct them “ratably,” or over time.
Mortgage insurance premiums
You can treat any amount of mortgage insurance paid in the tax year as mortgage interest. The rule applies to private mortgage insurance as well as FHA mortgage insurance premiums, VA funding fees, and USDA guarantee fees.
What’s not deductible
The following costs aren’t considered interest, so you can’t include them in your mortgage interest deduction:
- Most ground rent: Ground rent, or rent paid specifically on the land the property is on, can only be claimed as mortgage interest under very specific and unusual circumstances.
- Reverse mortgage interest: The IRS considers interest that accrues on a reverse mortgage to be home equity debt, which is not deductible.
- Rent payments for a home you purchase: Rent payments you make when you rent with an option to buy, for example, are not considered interest, so they’re not deductible as interest.
- Charges for services: Charges for closing services the lender provides in the process of financing your home purchase, such as appraisals and notary work, aren’t deductible.
- Loan placement fees: You can’t deduct placement fees the seller pays to arrange your financing.
Learn More: How Much Down Payment Do You Need to Buy a House
How to claim a mortgage interest deduction
Sitting down to fill out your income tax return and claim your deduction can be a daunting task. But preparation is key. As long as you have all the documents you need, it’s just a matter of following the instructions in the tax form booklets or online.
Here are the steps you should take so that you’re prepared to claim:
- Gather the documentation: Round up your Form 1098 and documentation for mortgage interest you paid that wasn’t reported on Form 1098. Also gather documents for any other itemized deductions you’re taking.
- Get a Schedule A (Form 1040 or 1040-SR): You can pick up a Schedule A from a local tax office or download it from the IRS website.
- Fill out the “Interest You Paid” section on Schedule A: This section is where you report all interest you earned. Line 8 pertains specifically to mortgage interest. You’ll transfer amounts from your 1098 form onto Schedule A.
- Add up your deductions: After you’ve finished entering information for all your itemized deductions and added the amounts from the lines indicated on the form, enter the total of your itemized deductions on Line 17.
- Fill the deduction amount on Form 1040: You’ll take the amount shown on Line 17 and enter it on Line 9 of your 1040 or 1040-SR.
These are good steps to follow, but please remember to always consult a tax professional on tax matters.
This article is a summary of publicly available material from the Internal Revenue Service. Credible Operations, Inc. is not a tax advisor, and you should not consider the contents of this article to be tax advice, or rely on the contents of this article in making financial decisions. Speak to a tax advisor, or refer to Internal Revenue Service Publication 936 for more information about the Mortgage Interest Tax Deduction.
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