What is the Mortgage Interest Tax Deduction?

Buying a home is a big step financially. It will be one of the most expensive purchases you’ll ever make.

However, with homeownership also come new tax deductions that could potentially help lower your tax liability. One of those tax deductions is the mortgage interest tax deduction.

Keep reading as we dig into exactly what the mortgage interest tax deduction is and what does and doesn’t qualify. We’ll also outline the steps you need to take to claim this deduction on your tax return.

What is the mortgage interest tax deduction?

The mortgage interest tax deduction is an incentive given to homeowners who itemize their taxes. This below-the-line deduction helps reduce your tax liability after establishing your adjusted gross income (AGI).

Unfortunately, because this deduction requires filing a Schedule A, this isn’t available to anyone who uses the standard deduction.

Is mortgage interest tax deductible?

Yes, mortgage interest is tax deductible for anyone who itemizes their taxes. Typically, in January, lenders will send out Form 1098, which includes the amount you paid in mortgage interest the previous year.

It’s important to understand that interest is the only deductible item. This doesn’t apply to principal payments or mortgage insurance.

Mortgage interest deduction limits

The limits on how much mortgage interest you can deduct have changed significantly over the years. Homes purchased before October 13, 1987, had no caps.

If you bought a home between October 13, 1987, and December 16, 2017, interest on the first $1 million would have been tax deductible if you filed married filing jointly. For those filing married filing separately, it would be $500,000 per person. 

However, that amount was further reduced due to the Tax Cuts and Jobs Act of 2017. For any home purchased after December 16, 2017, interest on the first $750,000 would be tax deductible if filing married filing jointly.

For anyone filing married filing separately, the limit would be $375,000 per person. 

What qualifies for the mortgage interest deduction?

Homeowners may be confused about what qualifies for the mortgage interest deduction. Here are some things that will qualify.

Mortgage insurance on your primary residence

Whether your primary residence is a house, condo, townhome, or mobile home, the interest is deductible as long as the property includes basic living needs, such as a kitchen, sleeping area, and bathroom. Plus, the home itself must be listed as collateral on the mortgage.

Mortgage insurance on a second home

The mortgage insurance on a second home might also be deductible. While you’re allowed to rent out the home for a portion of the year, you must meet some requirements to be able to deduct the mortgage insurance. 

You must use the home for your personal use either more than 14 days or more than 10% of the days you rent it, whichever is greater. Plus, if you have more than one second home, you can only claim the mortgage interest deduction on the first.

Mortgage interest on a home equity loan

With home values increasing significantly in recent years, many homeowners have turned to home equity loans and home equity lines of credit (HELOC) to access that equity for home renovations. 

If you have a home equity loan, you may be able to deduct the interest. However, to do so, you would have needed to use the home equity loan to either buy, build, or complete a significant update to your home. 

Mortgage Points

You might use points to lower your interest rate when you purchase a new home or refinance an existing mortgage. Because you’re essentially prepaying mortgage interest, the cost to purchase the points would be a tax deduction.

Penalty for Prepayments

Some lenders will charge a prepayment penalty if you decide to pay off your mortgage early. If so, this amount can be claimed as a mortgage interest deduction. 

Penalty for Late Payments

Most lenders will give you a 15-day grace period to make your mortgage payments before charging a late fee. If you’re charged a late fee, this amount would be considered mortgage interest and deductible.

What does not qualify for the mortgage interest deduction? 

Unfortunately, the following items would not qualify for a mortgage interest deduction.

• Homeowners insurance premiums
• Mortgage insurance premiums
• Moving expenses unless you’re active-duty military
• Down payments, deposits, earnest money that you forfeit
• Accrued interest from a reverse mortgage
• Closing costs such as settlement fees, title fees, legal fees, agent commissions, and home inspections

How to claim the mortgage interest tax deduction?

You’ll want to follow these steps when claiming the mortgage interest tax deduction.

1. Decide if you will use the standard or itemized deduction on your tax return

The first thing you need to do is decide whether to use the standard deduction when filing your taxes or itemize your deductions. Typically, you’ll want to use whichever will help you lower your tax liability the most.

The standard deduction will depend on how you file your tax return, but the amounts for the 2023 tax year (taxes due in April 2024) are as follows:

• Single: $14,700
• Married Filing Jointly: $29,200
• Married Filing Separately: $14,600
• Head of Household: $21,900

Both standard and itemized deductions help reduce your overall tax liability. However, you must show documentation for each deduction if you choose to itemize. 

2. Wait for your 1098 to arrive

Your mortgage lender will send you a Form 1098 toward the end of January or the beginning of February. This form lists the mortgage interest and points you paid during the previous tax year. You’ll need this documentation when itemizing mortgage interest. 

3. Utilize the correct tax forms

You must use the correct tax forms once you begin filing your tax return. 

• Schedule A: When itemizing your deductions, you must use a Schedule A. This will allow you to list each of the different deductions you’ll be claiming, including mortgage interest.
• Schedule C: If you have a small business and use a portion of your home as a home office, you can claim this on a Schedule C. Schedule Cs report a business’s profit or loss. 
• Schedule E: If you have a rental property that doesn’t meet the requirements for claiming mortgage interest on a Schedule A, you’ll file a Schedule E instead. This is used to report supplemental income from real estate.

The Bottom Line

If you’re a homeowner, you may be able to reduce your tax liability with the mortgage interest tax deduction. If you’re unsure if you qualify, speak with a qualified tax advisor to help you prepare your tax return.

Frequently Asked Questions

What other tax deductions are available to homeowners?

As a homeowner, you may also be eligible to deduct your property tax payments and capital gains taxes if you sell the home for a profit.

How much mortgage interest can I deduct?

You can deduct mortgage interest on up to $750,000 when married and filing jointly and up to $375,000 if married and filing separately.

What is the tax deduction form for mortgage interest?

Mortgage lenders send homeowners a Form 1098 stating the amount paid in mortgage interest during the year. This amount will be itemized on Schedule A when filing your tax return.