Is mortgage interest tax deductible?

As long as you meet all the requirements and your house qualifies, the answer is yes: You can deduct mortgage interest when you pay federal income tax. 

There are limits though —  the maximum mortgage interest deduction is limited based on when you took out your mortgage — and the deduction doesn’t directly lower your tax burden, unlike a tax credit (meaning if you owe $10,000 in taxes and also paid $10,000 in mortgage interest, you can’t subtract one from the other; you’re not off the hook.)

Buying a home doesn't come cheap and deducting mortgage interest on your taxes is a small benefit that can help ease the costs. Claiming a mortgage tax deduction allows you to lower your taxable income for the year, which in turn can lower how much tax you have to pay. You can deduct interest on your main home, second, home and even other homes like new constructions, as long as you and the home meet eligibility requirements set by the IRS.

What can you deduct as mortgage interest on your taxes?

In general, Interest that you're charged on a mortgage used to buy or build your home, even a second home, can qualify for the deduction. You can also deduct interest on a home equity loan. A few other costs also count as mortgage interest, which you can deduct on your taxes, and they include:

• Late payment charges, provided you didn't pay it in exchange for a specific service. 
• Prepayment penalties, incurred when you pay off your mortgage early, as long as it is not a charge covering a specific service or cost related to your home loan
• Private mortgage insurance (PMI), which is paid when you put down less than 20% down.
• Mortgage points, but typically only a portion of them unless you meet other requirements.

6 things that you can’t deduct as mortgage interest

• Interest paid on a reverse mortgage is generally not deductible.
• If you live in a home as a renter before closing on it, the money you pay as rent can't be deducted, even if your closing documents refer to those payments as interest.
• If you receive help from an assistance program, which makes interest payments for low-income homeowners, these payments are not deductible.
• if you receive a refund for some of the mortgage interest you've paid, you can't deduct the refunded amount.
• Homeowners insurance does not count as mortgage interest.
• Closing costs are typically not deductible.

→ Here are 11 more tax deductions for homeowners

How to deduct mortgage points

Points can help you buy down your mortgage rate and they are typically deductible, but they're a special case. The IRS views points as interest that you pay ahead of time, and you're usually not allowed to fully deduct points during the year you pay them. Instead, you can divide up the value of the points by the number of years in your loan term and deduct a portion each year. You'll need to meet some requirements, though, such as having a loan term of 30 years or less and not having an excessive number of points.

You might be eligible to deduct your points all at once if you meet a different set of requirements. One restriction is that the mortgage needs to be for your main home or primary residence. And your down payment, escrow deposit, and other funds you brought to closing must have been equal to or larger than the points charged. The points must have been calculated as a percentage of the loan's principal, and you can't have more points than is standard where you live, among other conditions.

If you qualify to deduct all your points in the year you paid them, it's up to you whether you want to do that or to spread the deduction out over the life of the loan.

How does the mortgage interest tax deduction work?

There are a few requirements you'll have to meet to be eligible to deduct mortgage interest. 

• You have to file Form 1040 or 1040-SR to pay your federal income tax.
• You have to itemize deductions, instead of taking the standard deduction.
• Your mortgage has to be secured debt, with your home serving as the collateral. 
• You need to have signed the mortgage, and it must have been recorded as your state or local law specifies.

Like other deductions, the mortgage interest deduction lowers your taxable income, which results in a lower tax bill. The IRS divides income into brackets and charges higher tax rates on income in higher brackets. When you take a deduction, less of your income is getting taxed at the highest rate you have to pay. How much you'll save depends on which tax bracket you're in, but it will be less than the dollar amount of the deduction.

Here's an example: Suppose your annual income is $75,000 and you paid $15,000 in interest for the year on a $400,000 mortgage loan. You can deduct the $15,000 so that only $50,000 of your income will be subject to taxes. (Keep in mind that you’re not saving $15,000 — you're saving $15,000 times your tax rate, in this case 22%, which comes out to $3,300, on your taxes.) 

Deductions are different from a tax credit, which would directly reduce your taxes by the exact value of the credit. Some tax credits are even refundable, meaning you could get money back — that never happens with a deduction.

→ Learn what home improvements are tax deductible and when

What types of homes qualify for the mortgage interest deduction?

A home can qualify even if it isn't a conventional single-family house. Condominiums and cooperatives are eligible, and so are mobile homes, house trailers, and houseboats. The home has to have a cooking space, a toilet, and sleeping quarters. 

Any of the following types of properties can be considered qualified homes:

• Main homes 
• Second homes
• Time-shares under certain circumstances
• Under construction homes
• Demolished homes

Generally, only the part of your home that you live in will be considered as a qualified home when deducting mortgage interest.  If you rent out part of your home or use part of it as an office, you may have to assess and divide the costs to see how much of your home is qualified for the deduction under IRS rules. 

Second homes

Typically, you can decide that a property is your second home even if you don't spend any time there. But if you sometimes rent your second home out to others, then you have to live in it for more than 14 days out of the year, or more than 10% of the number of days you rented it out if that's a longer period.

You can't get the mortgage interest deduction on more than two properties, so if you own a larger number of homes, you'll need to designate just one as your second home. Generally, you have to stick with that decision, but there are a few cases where you can change up which one is your second home — like if you buy a new home or if you sell your original second home.

→ Learn more about second home tax deductions

New builds and under-construction homes

A new construction home you’re building may qualify for the mortgage interest deduction even while it's still a work in progress. You can get the deduction on a home that's under construction for a period of up to 24 months, starting the date construction begins or afterwards. This only works, though, if the home is going to qualify for the deduction once it's ready to be lived in. So for example, you can't take the deduction on a home you're building to rent out full-time, because it won't qualify once construction is finished.

→ Read a step-by-step guide to buying a new construction home

Demolished homes

And what about every homeowner's worst nightmare: if something destroys your home? You might be able to keep taking the deduction on a home that's been demolished in a disaster, like a fire, tornado or earthquake. But this is allowed only if you're going to rebuild the home and move in soon, or if you're about to sell the land the home was built on.

How much mortgage interest can you deduct?

How much interest you can deduct depends on when you took out your home loan. If you borrowed before December 16, 2017, you can deduct interest on the first $1 million of your loan, or $500,000 if you're married and filing separately.

Mortgage interest deduction limits

If you took out a mortgage more recently, then the Tax Cuts and Jobs Act of 2017 applies. This law restricts the deduction to interest on the first $750,000 that you borrowed, or $375,000 for married taxpayers filing separately. The lower limits are set to expire at the end of 2025 unless Congress takes action to keep them in place.

Someone who has a second home and is paying two mortgages needs to add up the amounts of debt from the two loans. They can deduct interest on that total up to the applicable limit. For example, a person who borrows $500,000 for a primary home and $400,000 for a second home on December 16, 2017 or later has $900,000 in total debt on the two properties, but only $750,000 of that debt is eligible for the mortgage interest deduction.

The IRS provides a worksheet for figuring out the relevant limit in situations where one home was bought before the 2017 cutoff and the other was bought afterwards.

Mortgage interest deduction limits for refinances

For a refinance, the limit goes by the date that you took out your original mortgage. So for example, if you got a mortgage in 2016, then refinanced it in 2020, you can still deduct interest on up to $1 million of the debt you refinanced. You just want to keep in mind that this is only the case for refinancing the outstanding balance on your original loan — a cash-out refinance where you take on additional debt won't qualify for the  mortgage deduction.

How to claim the mortgage deduction on your taxes

To get the deduction, you'll first want to check your mail for Form 1098. Your mortgage servicer should send you Form 1098 if you paid at least $600 in interest on your mortgage during the year. In some cases, paying points or mortgage insurance premiums also counts toward that total.

Form 1098 shows how much you paid in mortgage interest and mortgage insurance. If you bought a primary home during the year, it lists the points you paid. It also includes other details like your home loan's origination date and remaining balance.

You'll use this form when you do your taxes. Claiming the mortgage interest deduction means you have to itemize your deductions, so you'll attach Schedule A to your income tax return and enter the deductible mortgage interest and points from Form 1098.

Usually, all the interest and points on Form 1098 are deductible, but there are exceptions. And in some situations, not all of the deductible interest or points you paid appear on your statement from the mortgage servicer. So you should read the instructions — or ideally, work with a professional tax preparer or financial advisor — to see exactly what you can deduct.

The mortgage interest deduction is added to all your other deductions, and then you enter the total amount of deductions on line 12a of your Form 1040 or 1040-SR.

The mortgage interest deduction can soften the blow of being charged a hefty sum of interest. While the tax savings will be only a fraction of the interest you pay, this tax break can make it a little easier to afford your home loan.