What Is Mortgage Interest Deduction?

Paying interest on debt is never fun—especially at today’s inflated rates. But with mortgages, there’s a silver lining: You may be able to deduct mortgage interest on your federal tax return.

That’s thanks to the Home Mortgage Interest Deduction, which lets you write off the interest you pay on your mortgage loan throughout the year. Interest on other second mortgages, such as home-equity loans and Helocs, can sometimes qualify, too.

Did you pay interest on a mortgage this year? If so, you’ll want the mortgage interest deduction on your radar. Here’s what to know—and how much it could save you. 

What is the mortgage interest deduction? 

The mortgage interest deduction is a type of itemized tax deduction that has been around in some form since a federal income tax was introduced in 1913. It allows you to deduct some or all of the interest you paid on mortgage loans from your total taxable income for that year. 

The exact amount you can deduct depends on two things: first, when you bought your home. Essentially, was it before or after the Tax Cuts and Jobs Act of 2017? If it was on or before Dec. 15, 2017, you can deduct the interest paid on the first $1 million in total mortgage debt ($500,000 if you’re married and file separate returns from your spouse). If you bought the house on Dec. 16, 2017 or later, you can only deduct interest on the first $750,000 in mortgage debt ($375,000 if married filing separately). 

Your deduction amount will also depend on how much interest you pay in a given year. This will vary based on your mortgage rate and how far into your loan you are. Because of the way mortgage interest is calculated, you’ll usually pay more interest early in your loan term than you will later on. 

For example, a homeowner with a $750,000 loan at 7% rate will pay more than $52,000 in interest in the first year of a 30-year mortgage but just over $2,200 by year 30. For someone in the 24% federal tax bracket, that could mean nearly $12,500 saved in taxes in year one and $528 at the end of the loan term.

Just keep in mind: You can only write off interest on up to those $750,000 or $1 million limits even if you borrow more, and you also must itemize your federal returns. If you take the standard deduction, you won’t also be able to deduct your mortgage interest—or any other individual deductions. (Learn more about weighing itemized deductions vs. the standard deduction below.)

What counts as mortgage interest?

To count as eligible mortgage interest in the Internal Revenue Service’s eyes, the interest must be accumulated on a loan secured by a home. That home can be a traditional, single-family house or another form of housing—such as a condo, co-op, trailer, mobile home or even boat, in some cases. 

Basically, it is “a property that has sleeping, cooking and toilet facilities,” says Paul T. Joseph, a certified public accountant and founder of Joseph & Joseph Tax & Payroll in Williamston, Mich. 

Beyond that, the home must also be your primary residence or a second home. We’ll go more into what that means, as well as some other instances when you can write off mortgage interest, below. 

A quick note: In some states, you may also be able to deduct some or all of your mortgage interest on your state return. California, for example, allows you to deduct interest on up to $1 million in mortgage debt—plus interest on up to $100,000 in home equity debt—before calculating your state income tax bill. The following are definitions for mortgage interest on federal returns only. 

Interest on a mortgage on primary residence

Your primary residence is the home you live in day-to-day. If you only have one home, live there most of the time and have a mortgage on it, then you can deduct the interest you pay on that loan—up to $750,000 in debt for recent homeowners—every year you live there.

Where it gets complicated is if you rent out part of your home. If that is the case, then you can deduct only part of the interest you pay—a share equal to the portion of the home you actually use for your living space. So, for example, if you use 50% of your home for your living area and 50% is your tenant’s, you could write off half of your mortgage interest on your annual returns.

Interest on a mortgage on a second home

If you own a second home or vacation property, you can deduct the interest you pay on mortgages attached to that, too—with some exceptions.

First, if you rent out the property—say on Airbnb, for example—you must use the property as your own home for at least 15 days out of the year or more than 10% of the number of days you rent it out (whichever is longer). If you rent out the home for 200 days, for instance, you would need to live in the home at least 21 days out of the year to qualify for the mortgage interest deduction. (Again, though, you can only deduct interest equal to the share of the year you personally use the home.) 

You also can’t deduct interest on third, fourth or fifth homes. So, if you own several vacation properties, you’ll have to pick which one you want to deduct interest on—and follow those same rules if you rent it out. 

Interest on a Heloc or home-equity loan

Home-equity loans and Helocs are technically types of second mortgages, so the interest you pay on those can qualify for the mortgage interest deduction, too—as long as you use the funds from the loan to “buy, build or substantially improve your home.”

The “buy or build” part is pretty simple, but “substantially improve” is more nuanced. According to the IRS, something that adds value to your home qualifies as a “substantial” improvement. Updates that prolong your home’s useful life—such as adding a new roof, for example—are another option, as are improvements that adapt your home to new uses. 

“When we talk about substantially improving, we mean making significant enhancements that increase the overall value of your property, such as adding or upgrading a bedroom or bathroom or adding to your overall square footage,” says Aaron Cirksena, founder of MDRN Capital, an investment, income and tax planning firm in Annapolis, Md. “It isn’t about routine maintenance or minor repairs.”

A good guideline? Cirksena says to think of it from an appraiser’s point of view.

“If an appraiser would say that your upgrades improve the value of your home to any significant degree, then they would qualify,” he says. 

Mortgage points

Mortgage points—an upfront fee you can pay at closing to lower your interest rate—are another form of mortgage interest, just prepaid. Deducting these is allowed, but sometimes, it gets complicated.

That’s because points typically benefit you beyond just the year you buy them in, so in some cases, you’ll need to deduct them “ratably,” as the IRS puts it. That basically means equally across your loan term, so you would divide the cost of the points by the number of years in your loan and deduct that amount each year you’re in the home. 

Your tax preparer can help you determine whether you need to deduct your points all at once or spread out across your loan term, but generally speaking, if you rolled the cost of the points into your loan balance, the points were particularly pricey for your area or they were charged in place of other common fees or as a flat fee, rather than a percentage of your loan amount, you’ll need to deduct your points ratably.

Late payment or prepayment penalties

If you get charged a late payment fee by your mortgage lender, you can deduct this, too. Prepayment penalties—a rare fee lenders may charge if you pay off your mortgage balance too early—are also an eligible deduction. 

Should I take the mortgage interest deduction? 

Whether you should take the mortgage interest deduction comes down to the age-old question of itemizing vs. using the standard deduction. “You’re entitled to take the larger of the two numbers,” notes Joseph.

The Tax Policy Center estimates about 8% of households can benefit from the mortgage interest deduction, with a greater share of people benefiting at higher income levels. For most people, though, taking the standard deduction makes the most sense. 

The IRS makes inflation adjustments to the standard deduction annually. For 2023 taxes, which you’ll file in 2024, it’s $13,850 if you file as a single person, $20,800 if you’re the head of household and $27,700 if you’re married and file your returns jointly. 

To see if taking your mortgage deduction is worth it, use Schedule A of your tax return to detail all your potential itemized deductions. In addition to mortgage interest, this might include certain medical expenses, property taxes, charitable gifts and more. If it all adds up to more than your standard deduction amount, then you should itemize your returns, taking the mortgage interest deduction—and any other itemized write-offs you’re eligible for—in the process.

There’s no hard-and-fast income cut-off for who can and can’t take the mortgage interest deduction, but according to Cirksena, your tax bracket can help guide you to the right decision.

“For those in the 12% Federal tax bracket or below, a mortgage tax deduction isn’t going to be very beneficial,” Cirksena says. “You would need to have an extremely large mortgage to receive any benefits, because of the standard deduction.”

Generally, he says, the mortgage interest deduction “starts making more sense” at the 24% tax bracket, which for 2023 means taxable incomes above $95,375 for single filers and $190,750 for married filing jointly.

If you do opt to take the deduction, make sure you have your Form 1098-Mortgage Interest Statement, which outlines how much interest you paid across the year, on hand when you file. Your mortgage company should send you this by Jan. 31, well ahead of tax day. 

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