What is mortgage interest deduction? Benefits, limits, and how it works

The mortgage interest tax deduction was originally intended as a business deduction since its introduction in 1913. In the late 1800s and early 1900s, few Americans had home mortgages; most loans were taken out for business expenses. Over the past 100 years, however, the tax deduction has allowed homeowners to deduct the amount of interest paid on their mortgages, often giving the biggest tax breaks to those with more expensive homes.

Whether you’re a current homeowner or prospective homebuyer, learn more about one of the most well-known tax deductions. Your newfound knowledge could save you money, prevent disappointment at the end of the tax year, or give you more insight into the complexities of U.S. tax law.

What is the mortgage interest deduction?

The home mortgage interest deduction is a tax law that lets you subtract your mortgage interest from your taxable income to lower your tax liability. In other words, interest payments can reduce your tax bill. 

In reality, many taxpayers who could claim this deduction are better off claiming the standard deduction. That’s because the standard deduction for 2024 is $14,600 for single taxpayers, $29,200 for married couples filing jointly and qualified surviving spouses, and $21,900 for heads of household. 

The higher your interest rate, the more you owe, and the higher your other itemizable deductions, the more you stand to save from the mortgage interest deduction.

How does the mortgage interest deduction work?

Here’s an example that illustrates how the mortgage interest deduction works. Let’s say your mortgage principal balance is $400,000 and your 30-year mortgage rate is 7%. Over the past year, you paid $28,000 in mortgage interest. Your pre-tax income was $100,000, and you file a joint return with your spouse.

If you take the standard deduction, you’ll subtract $29,200 from $100,000 to get a taxable income of $70,800. If you itemize and take the mortgage tax deduction, you’ll subtract $28,000 from $100,000 to get a taxable income of $72,000. In this case, it wouldn’t make sense to itemize unless you had other itemizable deductions — and with homeownership, there’s a good chance you would, because your property taxes would also be deductible.

Now let’s say everything is the same except that you’re single. Now, you’re looking at a $14,600 standard deduction or a $28,000 itemizable deduction. The choice is clear: You’re going to itemize. Your taxable income will be $72,000 instead of $85,400, a difference of $13,400. 

If your marginal tax rate (also known as your tax bracket) is 22%, your tax savings from itemizing will be 22% of $13,400, or $2,948. But remember, you had to spend $28,000 on interest to get that $2,948 in tax savings.

Who is eligible for the mortgage interest deduction?

You can’t claim the mortgage interest tax deduction unless you have an ownership interest in the home. The property must be your main home or a second home. 

Also, your home must be collateral for the mortgage. For most people, this will be the case, but it might not apply if you live in a co-op.

How to claim the mortgage interest deduction

To claim the tax credit, you’ll need to itemize your deductions on your federal tax return using Schedule A for Form 1040. To find out how much mortgage interest you paid during the previous year, you’ll need to look at Form 1098. The company you make your mortgage payments to should mail you this form or make it available to download from your online account by Jan. 31. 

In addition to mortgage interest, this form will also show any private mortgage insurance premiums you paid; these premiums are not deductible. If you took out a new home last year, Form 1098 will also show any mortgage points you paid to lower your interest rate. Any points reported on this tax form should be deductible, but check with a tax professional or read IRS Publication 936 to make sure.

What are the limits of the mortgage interest deduction?

There are two mortgage interest deduction limits. One relates to how much principal you’re paying interest on. The other relates to how you use the principal you’ve borrowed.

Principal limit

You can deduct mortgage interest on a maximum of $750,000 in mortgage debt if you took out your mortgage on or after Dec. 16, 2017. That limit isn’t a big deal if you live somewhere like Tampa or Atlanta, where the average home costs $400,000, but it could affect you if you live somewhere like Boston, Seattle, or San Diego, where the average home costs more than $1 million.

If you took out your mortgage before Dec. 16, 2017, the limit is $1 million ($500,000 if you’re married filing separately). The rules changed under the Tax Cuts and Jobs Act of 2017 and are scheduled to expire at the end of 2025.

Loan purpose

You can only deduct mortgage interest on a loan you used to “buy, build or substantially improve a qualified home.” A substantial improvement is one that lengthens your home’s life, adds to its value, or adapts it to new uses; repairs usually don’t count unless they’re part of a larger home improvement project. A qualified home is your main home or second home.

This rule probably doesn’t apply to you if the only mortgage you have was to buy or refinance the home you live in. 

However, if you paid mortgage interest on a home equity loan, HELOC, or cash-out refinance and you took out this loan on or after Dec. 16, 2017, you can’t deduct interest on any loan principal you used to pay off debt, take a vacation, or other purposes that don’t meet the definition of buying, building, or substantially improving a qualified home.

This rule doesn’t mean that if you used part of your home equity loan to consolidate debt and part of it to remodel your kitchen that none of the interest is deductible. It just means that you’ll have to calculate how much of the interest comes from the principal you used to remodel and only deduct that interest. 

• For example, if you borrowed $70,000 and your interest rate was 6%, your total annual interest would be $4,200. 
• Now let’s say you spent $40,000 of your loan on your kitchen, which is 57% of the loan amount. 
• Multiply your total annual interest ($4,200) by the portion of your loan it applies to (0.57) and you’ll see that you can deduct $2,394. 
• The remaining $1,806 is not deductible — but it’s probably a lot less than you were paying on your debt before you consolidated it.

Mortgage interest deduction FAQ

What are the current limits for the mortgage interest deduction?

You can deduct the interest on up to $750,000 in mortgage debt (per taxpayer, not per property) if you took out your mortgage on or after Dec.16, 2017. 

Can you deduct mortgage interest if you take the standard deduction?

No. You have to itemize if you want to deduct your mortgage interest. Use Schedule A to add up your deductions, and subtract that from your income to determine taxable income. 

What types of mortgages qualify for the interest deduction?

Any mortgage used to buy, build, or substantially improve your main home or second home qualifies for the mortgage interest deduction. It doesn’t matter whether your mortgage is conventional, FHA, VA, or some other type of mortgage loan.

How does the mortgage interest deduction affect my tax return?

The mortgage interest deduction can reduce how much federal income tax you owe if your mortgage interest exceeds the standard deduction. Claiming this deduction will make your tax return slightly longer, as you’ll need to file Schedule A.

Are there any recent changes to the mortgage interest deduction?

No, the mortgage interest tax deduction hasn’t changed since December 2017 when the Tax Cuts and Jobs Act became law. The law is set to expire at the end of 2025, which could change the amount of the standard deduction if Congress doesn’t act.