Mortgage Interest Deduction: Should You Claim It?

Alright, let's talk about something that we hope won’t make your eyes immediately glaze over: taxes. 

But hold on a second! 

We're not going into those deep, dark corners of the tax code today. We’re tackling something that could actually save you some serious cash—the mortgage interest deduction. It sounds complicated, we know, but we promise it's not rocket science. If you're a homeowner, or thinking of becoming one, this is information you definitely need to know. So, is this deduction really for you? Let’s find out.

What Is the Mortgage Interest Deduction?  

At its core, the mortgage interest deduction is a tax incentive that allows homeowners to subtract the interest paid on their home loans from their taxable income. Essentially, if you have a mortgage on your primary residence or a second home, the interest portion of your payments could reduce the amount of income you're taxed on. This can lead to significant savings when it's time to file your taxes. 

So, Is Mortgage Interest 100% Tax Deductible?  

Okay, here's where we need to get a bit more specific. It's not a complete free-for-all, unfortunately. You can't just deduct all of the interest you pay. 

There are limits, which we'll get into a bit later. It's not 100% deductible, but for many people, the portion that is deductible can still make a significant difference in their overall tax bill. 

How Does the Mortgage Interest Deduction Work? 

Now let’s talk about how the mortgage interest deduction actually works—it’s simpler than it sounds once you break it down. If you have a mortgage on your home, part of your monthly payment goes toward interest. The good news? That interest might help you save some money on taxes. Here’s a quick overview before we go into more detail: 

1. Understand What’s Deductible 

The IRS allows you to deduct the interest you’ve paid on a mortgage for your primary residence or a second home. This applies to mortgages up to $750,000 if you purchased the home after December 15, 2017. For older loans, the cap is $1 million. 

2. Receive Form 1098 

Your mortgage lender will send you Form 1098 sometime around the end of January, which details how much interest you paid over the year. Hold onto this form—it’s your proof for claiming the deduction. 

3. Choose to Itemize Deductions 

To take full advantage of the mortgage interest deduction, you’ll need to itemize your deductions on your tax return. This means listing out eligible expenses, like mortgage interest, state and local taxes, and charitable donations. 

4. Subtract the Interest from Your Taxable Income 

Once you’ve added up all your itemized deductions, including your mortgage interest, the total amount is subtracted from your income. This reduces the amount of income the IRS will tax, thus potentially lowering your tax bill. 

Straightforward enough, right? But the decision to itemize is a crucial part of the equation. 

Is it Worth Itemizing to Deduct Mortgage Interest? 

So, here’s the big question, and the answer really depends on your financial situation. 

The standard deduction is a set amount the IRS lets you subtract from your income without needing to list specific expenses. For 2024, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly. 

If your total itemized deductions (including mortgage interest, property taxes, and the like) exceed the standard deduction, it makes sense to itemize. For example: 

• Say you paid $10,000 in mortgage interest and $8,000 in property taxes last year. Combined with other deductions, your total itemized deductions might reach $20,000. In such a case, itemizing wouldn’t be worth it because the standard deduction is higher. 

• However, if your itemized deductions add up to $30,000, you’d save more by itemizing. 

It’s really a numbers game, and every situation is different. If you’re not sure which route to take, tax software or a professional can help you figure out which option benefits you the most.  

Mortgage Interest Deduction Limit 

Let’s talk numbers...again. Because when it comes to the mortgage interest deduction, the IRS sets clear limits on what you can deduct. 

If your mortgage originated after that aforementioned December 15, 2017 date, you can deduct interest on up to $750,000 of mortgage debt ($375,000 if married and filing separately). But for loans taken out before that date, the limit is higher: $1 million ($500,000 if married and filing separately). 

Why the big difference? Tax laws changed in 2017, lowering the deduction cap for newer mortgages. While that may reduce the benefits for some homeowners, plenty of people still find the deduction valuable, especially in higher-cost areas where mortgage balances tend to be, as you can guess, larger. 

It’s also worth noting that these limits apply to combined mortgage debt. So, if you have a second home, the mortgage on that property counts toward the total. 

Now that we’ve covered the limits, let’s look at an example to show how this deduction could impact your taxes. 

Mortgage Interest Deduction Example 

Say you purchased a home with a $600,000 mortgage at a 6% interest rate. Over the course of the year, you paid $36,000 in interest. Since your loan is under the $750,000 limit, all $36,000 of that interest is deductible. 

Now, let’s assume your total income for the year was $120,000. If you’re filing as a single taxpayer and you itemize your deductions—including that $36,000 of mortgage interest, $10,000 in property taxes, and $1,000 in charitable donations—you’d have $47,000 in total deductions. 

Instead of being taxed on the full $120,000, you’d only be taxed on $73,000 ($120,000 - $47,000). Which could result in thousands of dollars saved in taxes, depending on your tax bracket. 

This is just one hypothetical example, but it shows how the deduction can make a difference. 

What Mortgage Interest Is Actually Tax Deductible?  

Not all mortgage-related costs qualify for this deduction, so it’s important to know what’s included. Here’s what typically counts: 

• Interest on your primary residence: If you have a mortgage for your main home, the interest paid is deductible, up to the limits we just discussed. 

• Interest on a second home: As long as it’s not a rental property, you can deduct interest on a second home. 

• Points paid at closing: If you paid points to lower your mortgage interest rate, you might be able to deduct those costs as well. 

• Late payment interest: If you had to pay interest on a late mortgage payment, this can also qualify. 

However, not everything tied to your mortgage makes the cut. Expenses like homeowners insurance, HOA fees, and principal payments don’t qualify. And if you’re paying private mortgage insurance (PMI), note that this is no longer deductible for most taxpayers after 2020. 

Common Myths About the Mortgage Interest Deduction

The mortgage interest deduction gets a lot of positive press, but there’s also plenty of misinformation swirling around. Such as...  

Myth #1: It’s a Benefit for Everyone 

Not all homeowners see a benefit from the mortgage interest deduction, and here’s why: you need to itemize your deductions to claim it. That means you’d have to forgo the standard deduction, which, for many taxpayers, can be a better deal. 

Myth #2: Bigger Mortgages Mean Bigger Savings 

It’s easy to think that a large mortgage equals more tax savings, but that’s not entirely true. While it’s correct that the more interest you pay, the larger the potential deduction, you’re still subject to the IRS limits. 

Myth #3: It’s Only for the Wealthiest Homeowners   

This myth assumes that the deduction primarily benefits those with luxury homes and high incomes, but that’s not entirely true. Many middle-class homeowners also benefit from the mortgage interest deduction, especially those in areas with higher housing costs. 

That said, changes to tax laws in recent years have reduced its impact. The combination of a higher standard deduction and lower mortgage interest caps means fewer taxpayers are itemizing their deductions.  

Is It Worth Claiming Mortgage Interest? 

Okay, let’s finally get to the heart of the matter—should you claim the mortgage interest deduction (better late than never, right)? 

On the plus side, the mortgage interest deduction can reduce your taxable income, potentially saving you money when tax season rears its...head. It’s particularly helpful for those who’ve made significant mortgage payments and who itemize deductions. For some, this can translate to meaningful savings. 

But as we learned, not everyone benefits. If your total itemized deductions don’t exceed the standard deduction, claiming mortgage interest may not be the best choice.  

Expert Tip

If tax talk is a mess, don’t stress. Consider reaching out to a tax professional who can guide you through the specifics of your situation.

Lastly, did you know there are a few more major tax benefits homeowners specifically can enjoy? What are they you ask? Why, of course, the Knowledge Center has the answers! Check out the other tax benefits of homeownership and contact our team directly to assist you with any questions or personalized advice. Homeownership certainly has its perks—don’t miss out on the ones that can make a difference for your financial future.