What Is the Mortgage Interest Deduction?

There are several potential tax breaks of homeownership, such as the ability to deduct your property taxes under the state and local taxes (SALT) deduction, or the ability to avoid capital gains tax on the profitable sale of your primary home.

One benefit that could be very valuable to homeowners year after year is the mortgage interest deduction. Here’s a rundown of what the mortgage interest deduction is, how it works, and what you need to know about it.

What is the mortgage interest deduction?

The mortgage interest deduction allows qualified taxpayers who itemize deductions on their tax return to deduct the interest paid during the tax year on as much as $750,000 in mortgage principal (the original amount you borrow). The mortgage interest deduction can be one of the biggest tax benefits of owning a home.

Technically, the mortgage debt must meet the IRS definition of qualified personal residence debt for home mortgage interest to be deducted. Generally speaking, this means the mortgage has to fit into one of three categories:

  1. A mortgage on your primary home or main home: This is a common way many homeowners qualify.
  2. A mortgage on a second home or vacation home: However, you either can’t rent it out, or you need to live in it for at least 14 days during the year or at least 10% of the days it was rented, whichever is greater.
  3. Home equity debt or a second mortgage on a qualifying property used to “substantially improve” the home: For example, a home equity loan you used to pay for a vacation wouldn’t count, even though it’s technically a mortgage.

Learn more: Best Mortgage Lenders

Mortgage interest deduction specifics

Here are some other useful things to know about how the deduction works:

  • The home doesn’t necessarily need to be a house or condo: It does need to have sleeping, cooking, and restroom facilities, however. So, an RV can count, and so can a houseboat, to name a couple examples.
  • If you paid points when you got the real estate loan: You generally deduct points over the term of your mortgage, although in some situations you can deduct them in the year you pay them. (Points are a form of prepaid interest, and the short version is that paying points is agreeing to an additional upfront cost in exchange for a lower interest rate on your loan.)
  • Late payment charges and prepayment penalties: These can be considered mortgage interest in most cases.
  • Mortgage insurance premiums are often deductible: This includes private mortgage insurance (PMI) or FHA mortgage insurance. However, deducting mortgage interest applies only if your adjusted gross income is below a certain threshold.
  • Other closing costs are generally not deductible: This includes things like homeowners insurance and principal payments.
  • Prior to the Tax Cuts and Jobs Act, the limit was $1 million in mortgage debt: Now it’s $750,000. However, homeowners who bought houses before Dec. 16, 2017, are grandfathered in to the higher mortgage interest tax break limit.

It’s also worth noting that the mortgage interest deduction is the same for single and married joint tax filers, as far as the limit goes. In other words, the mortgage principal limit is $750,000 regardless of whether one or two people are filing the tax return.

Read more: What Is Private Mortgage Insurance?

How does mortgage interest deduction work?

To be perfectly clear, the mortgage interest deduction can only be used by a homeowner if they choose to itemize deductions on their return. If you take the standard deduction, you cannot also deduct your mortgage interest.

For 2022, the standard deduction is $25,900 for married couples and $12,950 for single filers. If your itemizable deductions are above your standard tax deduction amount, it can be worth itemizing. These include mortgage interest, charitable contributions, qualified medical expenses, and a few others.

The standard deduction amounts are much higher than they were before the Tax Cuts and Jobs Act went into effect in 2018. And as a result, far fewer people claim the mortgage interest deduction than previously. Even so, with home prices and mortgage interest rates rising, it is sure to be a valuable deduction for many people. This is especially true for those who bought homes in 2022.

As an example, let’s say that you have a $500,000 mortgage on your primary home and you pay $20,000 in interest during 2022. You can deduct that amount on your tax return if you choose to itemize deductions.

How do you calculate the mortgage interest deduction?

Here are two scenarios that demonstrate how to calculate the mortgage interest deduction. For either situation, you can use a mortgage interest tax deduction calculator to help determine your potential tax break.

If mortgage principal is lower than the maximum

If your original mortgage principal balance is lower than the maximum for the mortgage interest deduction ($750,000 or $1 million, depending on when you bought), here’s how the calculation works.

Your mortgage servicer will send you a tax form called a 1098 soon after the end of the year, and it will show how much interest you paid during the year. If you decide to itemize deductions, you can deduct the entire amount.

If mortgage principal is higher than your limit

On the other hand, if your mortgage principal is in excess of your applicable limit, the deduction gets a little more complicated. For example, let’s say you bought a home in 2020 and got a $900,000 mortgage. Your interest would be prorated for the purposes of the deduction so you’re only deducting interest on the first $750,000 in principal.

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