Mortgage Interest Deduction: How Homeowners Can Save on Taxes

The amount of taxes you pay has a significant impact on your take-home income, but there are several strategies you can use to reduce your taxable income and save money.

The mortgage interest deduction is one of several tax deductions you may qualify for. If you make mortgage payments on your home, you may be able to claim the interest paid as a write-off to reduce your tax bill.

If you’re a homeowner and you’re not taking advantage of the homeowners’ interest deduction, you may be missing out on crucial tax savings. Learn more about the mortgage interest deduction and find out if you qualify.

How does the mortgage interest deduction work?

The mortgage interest deduction is a tax deduction you can use to write off the mortgage interest you pay throughout the year. 

Each time you make your house payment, a portion of that payment goes to interest and the rest goes toward the principal amount. At the end of the year, you can account for the total mortgage interest you’ve paid and deduct some or all of it on your tax return.

But it’s not as simple as a quick calculation; there are also certain conditions that must be met to claim this deduction, which we’ll cover in more detail below.

Home mortgage deduction limit

If you recently bought a home, you’re probably wondering how much you can deduct. Fortunately, most homeowners are able to deduct all of the mortgage interest they pay each year.

The mortgage interest deduction limit is $750,000, or $375,000 if you’re married filing separately. This means you can deduct mortgage interest on the first $750,000 or $375,000 of debt, respectively. As such, many homeowners are able to deduct 100% of their mortgage interest.

If you’re deducting mortgage interest for a mortgage that began before December 16, 2017, you can deduct the interest paid on the first $1 million ($500,000 if married filing separately) of debt.

What properties qualify for this deduction?

There are several requirements a property has to meet to qualify for the mortgage interest deduction. Generally speaking, you can deduct mortgage interest on your primary home or your second home. The mortgage must have been obtained in “acquiring, constructing, or substantially improving” the residence and must be secured by the home.

You can only have one primary residence, or main home, at once. This is the home where you live most of the year. Your primary residence can include a:

• House
• Condominium
• Cooperative
• Mobile home
• House trailer
• Boat

If you own a second home, you may also be able to deduct mortgage interest payments. If you don’t rent your second home out, you can treat it as a qualified home even if you don’t live there at any point during the year.

For a second home or vacation home that you’re renting out, you have to use it for part of the year to qualify for the homeowners’ interest deduction. You must use your second home for 14 days or 10% of the number of days it was rented out, whichever is longer.

The mortgage interest would be prorated between personal use (itemized deductions) and rental days (rental expenses). If the home qualifies as a rental property, the mortgage interest will be deducted against rental income on Schedule E.

If you have several homes, you can only designate one main home and one second home. However, there are some circumstances where you can designate a different home as your second home during the year.

Mortgage interest deduction example

Let’s take a look at a mortgage interest deduction example so you can see how this deduction might apply to you. If you pay $850 per month in mortgage interest, that’s $10,200 per year.

If you’re married filing jointly, the standard deduction for tax year 2024 is $29,200. Unless you have nearly $30,000 in deductible expenses, you wouldn’t itemize and take advantage of the mortgage interest deduction.

Mortgage interest deduction for second homes

Is mortgage interest tax deductible on a second home? The short answer is yes, but there are specific requirements your second home has to meet to be eligible.

Let’s say you recently purchased a vacation home, and you want to deduct your mortgage interest. You can do that as long as that vacation home is designated as your second home and meets the qualified home requirements.

If you don’t rent out your second home, you don’t have to do anything to treat it as a qualified home. You also don’t have to worry about spending a certain number of days at the property to qualify for the deduction.

If you rent out your second home, you have to use it for more than 14 days or 10% of the number of days it’s rented out, whichever is longer. If you don’t meet this requirement, your second home will be considered a rental property, and the mortgage interest will be deductible against the rental income.

People who have more than one second home can choose which home they want to designate as a qualified home. You can only treat one additional home as a qualified second home, and it has to meet the standard qualified home requirements.

If the house is in both of your names, you’re both generally entitled to claim the mortgage interest deduction on your taxes. You don’t have to claim this deduction.

If you’re both making mortgage payments, you can each deduct the portion of the mortgage interest you paid.

When only one person makes mortgage payments but the 1098 has two names on it, only the person who made the payments is entitled to claim the interest deduction. This person can claim the full amount on Form 1098.

For spouses filing separate returns, you can each designate separate homes as the qualified home. Both spouses can also consent to the primary and secondary homes being designated by one spouse.

The effect of refinancing on the mortgage interest deduction

Generally speaking, you’re still eligible to claim the mortgage interest deduction if you refinanced. You’ll pay mortgage interest on your refinanced loan, which means you’re eligible for the deduction.
If you paid mortgage points when you refinanced your loan, you may be able to deduct them. Each point is equal to 1% of the loan amount. Lenders use several names to refer to points, including:

• Lender origination fee
• Maximum loan charge
• Discount points
• Loan discount

When you deduct mortgage points on your taxes, you have to deduct them over the life of the loan. If you pay points on a 15-year loan, you can deduct a portion of the points you paid for each of those 15 years.

Settlement fees are also a common part of refinancing a mortgage, but you don’t get a break on those. You typically can’t deduct settlement fees in a mortgage refinance, which includes things like:

• Appraisal fees
• Attorney fees
• Inspection fees
• Legal and recording fees

How to deduct your mortgage interest on your taxes

Deducting mortgage interest on your taxes starts with filing an itemized return, which means you’ll need Form 1040 (Schedule A) in addition to the standard 1040 form.

If taxpayers have total itemized deductions greater than their standard deduction, they would choose to receive the greater tax benefit by itemizing.

Start by completing Schedule A. There are a handful of lines you want to focus on when you’re deducting mortgage interest and points:

• Line 8a: Home mortgage interest and points reported to you on Form 1098
• Line 8b: Mortgage interest not reported to you on Form 1098
• Line 8c: Points not reported to you on Form 1098
• Line 8d: Reserved for future use
• Line 8e: Add lines 8a through 8c

Line 8e will be your total deduction for mortgage interest and points. Once you complete Schedule A and add up all your deductions, you can write that total on line 12 of Form 1040.

Keep in mind that the IRS expects you to maintain records for all of the itemized expenses you claim on your tax return. It’s important to hang onto receipts, bills, and canceled checks for any expenses you’re deducting.