Mortgage Interest Tax Deduction: Know Your Benefits

The mortgage interest tax deduction lets you deduct interest paid on up to $750,000 of qualified home debt ($375,000 if married filing separately). You must itemize deductions to benefit—if your standard deduction is higher, you won’t save anything from the mortgage interest deduction. For a $400,000 mortgage at 6.5%, you might pay $25,000 in interest annually, potentially saving $5,500-$8,000 in taxes depending on your bracket.

How the Mortgage Interest Deduction Works

The Basic Concept

If you itemize deductions on Schedule A:

Deduct interest paid on qualified home mortgages
Reduces your taxable income
Actual tax savings depends on your tax bracket

Example Calculation

Scenario:

Mortgage: $400,000 at 6.5%
Annual interest paid: ~$25,800
Your tax bracket: 24%

Tax savings: $25,800 × 24% = $6,192 in tax savings

Who Actually Benefits

You benefit if: Your itemized deductions exceed the standard deduction

2024 Standard Deduction:

Single: $14,600
Married filing jointly: $29,200
Head of household: $21,900

Reality check: Many homeowners don’t have enough itemized deductions to exceed the standard deduction, especially married filers.

Qualification Requirements

Qualified Home Loans

Deductible mortgage interest includes:

First mortgage on primary residence
First mortgage on second home
Home equity loan (if used for home improvement)
HELOC (if used for home improvement)
Refinanced mortgages

Debt Limits

When Loan Originated	Maximum Deductible Debt
After Dec 15, 2017	$750,000 ($375,000 MFS)
Oct 13, 1987 - Dec 15, 2017	$1,000,000 ($500,000 MFS)
Before Oct 13, 1987	No limit (grandfathered)

Qualified Use

For home equity debt (HELOC, home equity loan):

Interest only deductible if used to “buy, build or substantially improve” your home
Using equity for debt consolidation? Not deductible
Using equity for kitchen remodel? Deductible

Itemizing vs Standard Deduction

When to Itemize

You should itemize if your deductions exceed:

$14,600 (single)
$29,200 (married filing jointly)

Common Itemized Deductions

Deduction	Limit
Mortgage interest	$750K debt limit
Property taxes	$10,000 SALT cap
State income taxes	$10,000 SALT cap (combined)
Charitable contributions	60% of AGI
Medical expenses	Above 7.5% of AGI

Itemization Example

Married couple:

Mortgage interest: $18,000
Property taxes: $8,000
State income tax: $6,000
Charitable: $3,000
Total itemized: $35,000

Standard deduction: $29,200

Should itemize: Yes, saves on $5,800 of additional deductions

When Standard Deduction Wins

Married couple with smaller mortgage:

Mortgage interest: $12,000
Property taxes: $5,000
State income tax: $4,000
Charitable: $2,000
Total itemized: $23,000

Standard deduction: $29,200

Should NOT itemize: Standard deduction is $6,200 higher

Calculating Your Deduction

Form 1098

Your lender sends Form 1098 by January 31 showing:

Box 1: Mortgage interest received
Box 2: Outstanding principal
Box 5: Mortgage insurance premiums (if applicable)

Multiple Properties

If you have loans on primary and second home:

Combine interest from both
Subject to $750,000 total debt limit
Only primary and one second home qualify

Points Paid

Points on purchase:

Generally deductible in year paid
If you paid $3,000 in points, deduct $3,000

Points on refinance:

Must deduct over life of loan
$3,000 points on 30-year loan = $100/year deduction

The SALT Cap Impact

State and Local Tax (SALT) Limit

Combined deduction for state/local taxes capped at $10,000:

Property taxes
State income taxes
Local income taxes

How This Affects the Math

High-tax state homeowner:

Property taxes: $15,000
State income tax: $12,000
Only $10,000 deductible (not $27,000)

This $10,000 cap means many homeowners can’t itemize even with significant mortgage interest.

Mortgage Insurance Premiums

PMI Deductibility

The PMI deduction has been:

Available in some years
Expired and renewed multiple times
Check current tax law

When available:

Income limits apply (phases out above $100,000 AGI)
Must itemize to benefit

What Counts

private mortgage insurance (PMI)
FHA loan insurance premium (MIP)
VA funding fee (some portions)
USDA guarantee fee

Tax Deduction by Income Level

Impact Varies by Tax Bracket

Tax Bracket	Interest Paid	Deduction Value
10%	$20,000	$2,000
12%	$20,000	$2,400
22%	$20,000	$4,400
24%	$20,000	$4,800
32%	$20,000	$6,400
35%	$20,000	$7,000

Higher income = higher bracket = more valuable deduction.

The Marginal Benefit

You only save on the portion of itemized deductions exceeding your standard deduction.

Example:

Itemized: $32,000
Standard: $29,200
Excess: $2,800
Tax bracket: 24%
Actual tax savings: $672 (not 24% of full mortgage interest)

Second Home Interest

Qualification

You can deduct interest on a second home if:

It’s used personally (not primarily rented)
Combined debt with primary doesn’t exceed $750,000
You itemize deductions

Second Home Definition

Qualifies:

Vacation home you use
House, condo, co-op
Boat or RV with sleeping, cooking, bathroom facilities

Doesn’t qualify:

Investment property (different rules)
Property rented more than personal use allows

Rental Use Limits

If you rent your second home:

Must use personally 14+ days or 10% of rental days
Otherwise treated as rental property
Different tax rules apply

Home Equity Loan Interest

Post-2017 Rules

HELOC and home equity loan interest is only deductible if proceeds are used to:

Buy the home
Build the home
Substantially improve the home

Deductible Uses

Use of Funds	Deductible?
Kitchen remodel	Yes
Add a room	Yes
New roof	Yes
Pay off credit cards	No
Buy a car	No
Pay for college	No

Documentation

Keep records showing how you used the funds. If audited, you’ll need to prove the connection between the loan and home improvement.

Refinance Considerations

Interest Remains Deductible

Refinancing doesn’t change deductibility. Interest on the new loan is deductible up to:

Original debt amount (for debt before Dec 2017)
$750,000 (for debt after Dec 2017)

Cash-Out Refinance

Cash used for home improvement:

Interest on that portion is deductible

Cash used for other purposes:

Interest on that portion is NOT deductible

Points on Refinance

Points paid when refinancing must be:

Deducted over the life of the loan
Not all in the year paid

Common Mistakes

Assuming You’ll Benefit

Many homeowners assume mortgage interest saves them taxes. Run the math—if standard deduction is higher, you save nothing from mortgage interest.

Forgetting About Points

Points paid at purchase are often forgotten. Check your closing documents for deductible points.

Missing Second Home Interest

If you have a vacation home with a mortgage, that interest may also be deductible.

Using Home Equity for Non-Home Purposes

Interest on home equity debt used for anything other than home improvement is no longer deductible.

Not Keeping Records

If you use home equity for improvements, keep receipts and records proving the use.

Planning Strategies

Bunch Deductions

If you’re near the itemizing threshold:

Prepay January mortgage in December
Make charitable contributions in same year
Bunch medical expenses if possible

Consider Your Tax Bracket

The deduction is worth more in higher brackets. If your income varies, time deductions for high-income years.

Evaluate Paying Off Mortgage

The tax deduction reduces the effective cost of mortgage interest. But if you don’t itemize anyway, paying off the mortgage has no tax cost.

Frequently Asked Questions

Is mortgage interest still tax deductible?

Yes, on up to $750,000 of qualified home debt. But you must itemize deductions—if your standard deduction is higher, the mortgage interest deduction provides no benefit.

How much can I save with the mortgage interest deduction?

Depends on your interest paid and tax bracket. $20,000 in interest at 24% bracket = $4,800 potential savings, but only if you itemize and your itemized deductions exceed the standard deduction.

Can I deduct interest on a second home?

Yes, if you use it personally and your combined debt doesn’t exceed $750,000. Rental properties have different rules.

Is HELOC interest deductible?

Only if you use the funds to buy, build or substantially improve your home. Interest on HELOC funds used for other purposes (debt consolidation, education, etc.) is not deductible.

What is Form 1098?

Form 1098 is the mortgage interest statement your lender sends you each January. It shows how much interest you paid during the year.

Should I pay off my mortgage to lose the deduction?

The tax deduction shouldn’t drive this decision. If you don’t itemize anyway, there’s no tax cost to paying off the mortgage. Even if you do itemize, the deduction only reduces the cost of interest—you’re still paying more interest than you’re saving in taxes.

Does the mortgage interest deduction help first-time buyers?

It can, but many first-time buyers have smaller mortgages and fewer other deductions, making the standard deduction more beneficial. Run the numbers for your specific situation.

Maximize your savings with mortgage interest deductions