Buying a home has never been more expensive, but if you can find one you can afford, there’s some good news after you move in: You might be able to take advantage of the mortgage interest deduction to lower your tax bill.

IRS rules regarding the mortgage interest deduction can be very complicated, however. Here’s a guide to help you understand what interest qualifies for the deduction and how you can benefit if you’re eligible. A caveat: The mortgage interest deduction once was generous enough that many home owners took advantage. Now, though, the break primarily benefits taxpayers with large loans and hefty interest payments.

Key takeaways

  • IRS rules may let you deduct interest paid on your mortgage from your income for tax purposes
  • To claim this deduction, you need to itemize. You cannot take the standard deduction.
  • Deductions are limited to interest charged on the first $1 million of mortgage debt for homes bought before December 16, 2017, and $750,000 for homes bought after that date.
  • The deduction can apply to costs related to mortgage interest, such as mortgage points.

What is the mortgage interest deduction?

If you have a home loan, the mortgage interest deduction might allow you to reduce your taxable income by the amount of interest paid on the loan during the year, along with some other expenses such as mortgage insurance premiums and points.

The deduction applies only to the interest on your mortgage, not the principal, and to claim it, you need to itemize your deductions. You can use Bankrate’s mortgage interest deduction calculator to get an estimate of the type of savings you can expect when you file your taxes.

The mortgage interest deduction has been around for more than 100 years, but has changed over time. Different administrations have amended the rules for this perk.

The mortgage interest deduction got its start alongside the first income taxes, which were implemented in 1894 and 1913. At the time, all interest payments were tax deductible. At the time, homeownership was much rarer than today.

The 1930s saw the formation of the Federal Housing Agency, which insures mortgages and the post-war GI Bill helped provide easy loans to veterans returning from World War II, which ballooned the homeownership rate to 62% by 1960.

During the 1970s, credit cards became more common, leading people to deduct huge amounts of interest on their taxes. In 1986, Congress passed a law ending the deductibility of most interest, but leaving the mortgage interest deduction in place, placing a $1 million cap on the loan principal eligible for deductions.

Since then, there have been some changes to the deduction. For example, former President Trump reduced the maximum loan amount to $750,000.

Mortgage interest deduction limit

If your home was purchased before Dec. 16, 2017, you can deduct the mortgage interest paid on your first $1 million in mortgage debt ($500,000 if you are married filing separately).

For mortgages taken out since that date, you can deduct only the interest on the first $750,000 ($375,000 if you are married filing separately). Note that if you were under contract before Dec. 15, 2017, and the mortgage closed prior to April 1, 2018, your mortgage is considered to have been before Dec. 16, 2017.

How to claim the mortgage interest deduction

While almost all homeowners qualify for the mortgage interest tax deduction, you can only claim it if you itemize your deductions on your federal income tax return by filing a Schedule A with Form 1040 or an equivalent form.

Because of this, you’ll have to decide whether it’s better to deduct the mortgage interest by itemizing or taking the standard deduction. The standard deduction for tax year 2022 is $12,950 for single filers and $25,900 for married taxpayers filing jointly.

That means that the mortgage interest you paid, plus any other deductions you’re eligible for, would need to exceed those amounts for it to make sense to itemize.

To claim the mortgage interest deduction, follow these steps.

  1. Watch for communications from your lender or servicer early in the year. You don’t have to keep track of how much interest you’re paying; your lender or servicer takes care of that and will send you Form 1098. This should arrive near the end of January or sometime in early February, and should also include information about other deductible costs, like points or fees paid.
  2. Do the math. You’ll need to determine if itemizing your deductions (your mortgage interest charges and any other eligible deductions) will give you a larger total deduction than the standard deduction.
  3. Give your Form 1098 to your tax professional, or complete the Schedule A on Form 1040 on your own. All reported mortgage interest will be entered on line 8a, any unreported will go on line 8b and mortgage insurance premiums will go on line 8d.

What qualifies as mortgage interest?

The IRS general definition of “mortgage interest” is interest that accrues from any loan secured by your primary home or a second home. There are other costs and fees that can be included in the mortgage interest deduction, too. Here’s a rundown:

  • Any interest on your home – The property must include sleeping, cooking and eating facilities and can be a home, condo, co-op, mobile home, boat or recreational vehicle.
  • Interest on a second home you don’t rent out – If you do rent out the property for a certain period of the year, you’ll need to meet certain guidelines (specifically, using it for your own use either more than 14 days or more than 10 percent of the time it’s rented out, whichever is longer) to deduct the interest. Be sure to read up on other tax deductions for a rental property.
  • Late payment fees – If you’re late on a payment, you can likely deduct the extra fee you’re charged.
  • Prepayment penalties – If you’re charged a penalty fee for paying off your mortgage early, you can deduct this amount.
  • Points – If you paid points to lower your mortgage interest rate, you can deduct a portion of these that applies to the individual filing year.
  • Home equity loans and home equity lines of credit used to improve your home – If you took out a home equity line of credit (HELOC) or home equity loan to pay for a home renovation project, you can deduct interest on the amount you used to upgrade your property.

What mortgage costs are not deductible

  • Interest on a mortgage for a third or fourth home
  • Any interest on a reverse mortgage
  • Mortgage insurance payments
  • Homeowners insurance
  • Appraisal fees
  • Notary fees
  • Closing costs or down payment money
  • Extra payments made toward the principal
  • Home equity loan funds/HELOC funds used for purposes unrelated to your property (for example, if you borrowed against your home to pay for a wedding, these funds are not deductible)

Special considerations for the mortgage interest deduction

When you review the IRS guide for the mortgage interest deduction, you’ll notice a lot of language that details exceptions in certain situations. Below is a partial list of those special considerations. If you have a unique circumstance, review the most up-to-date IRS Publication 936 or ask a tax professional for guidance.

  • Home office complications – If you use a portion of your property for a home office, you’ll need to calculate the specific square footage used for living versus working. The “living” space is the only portion that qualifies for a mortgage interest deduction.
  • Home under construction – If you’re building a home, you have a 24-month period that qualifies under mortgage interest deduction guidelines.
  • Home sales – If you sold your home last year, you’re still allowed to deduct interest accrued on the loan up to — but not including — the date of the sale.
  • Paying points when refinancing – If you refinanced your mortgage in 2021 and paid points to lower the rate, you likely cannot deduct the cost of those points in full. Instead, you may be able to deduct a portion of those points over the life of the new loan.

Bottom line

The mortgage interest deduction can help homeowners save money on their taxes, but this break typically only benefits people with large loans or loans at high interest rates. Keep an eye on how much interest you pay and compare it to the standard deduction. If you pay more in interest than the standard deduction, this tax deduction can help you save money.