Is mortgage interest deductible?

Homeowners face a number of financial concerns when it comes to owning and maintaining their houses. In addition to the monthly mortgage payment, you have to worry about costs for maintenance, cleaning, utilities, lawn care, pests, home improvement and emergencies.

The good news is there may be a way to use a portion of your mortgage payment to reduce the amount of income taxes you pay.

How does mortgage interest work?

Mortgage interest is essentially the cost of borrowing money to buy a house. Lenders charge interest as a percentage of the amount borrowed (the principal). The interest rate is part of the annual percentage rate (APR), which includes other fees from the lender. Interest rates on mortgages vary by loan type and lender. They also vary based on your credit score, down payment amount and debt-to-income (DTI) ratio.

Some borrowers choose to reduce their interest costs with mortgage points. Mortgage points are upfront fees the borrower pays to the lender in order to reduce the interest rate on a loan. One point typically is 1% of the mortgage amount and lowers the interest rate by 0.25%, though point costs and interest rate reductions vary by lender.

What is the mortgage interest deduction?

A tax deduction is a claim on your tax return that reduces your taxable income. Your tax liability, or the amount of taxes you owe, is calculated based on taxable income. Essentially, the lower this amount is, the lower your tax liability.

Mortgage interest is tax deductible as long as certain conditions are met. The amount you can deduct is based on the date of your mortgage, the mortgage amount and how you use the mortgage funds.

Mortgage interest deduction limits

If you took out your mortgage on or before Oct. 13, 1987, your mortgage interest is fully tax deductible, without limits. Also, if your mortgage balance is $750,000 or less (or $1 million or less if the debt was incurred before Dec. 16, 2017), the interest is fully deductible. These amounts are reduced by half if you are married and file tax returns separately from your spouse.

The amount you can deduct depends on the date of the mortgage, the mortgage amount and how you use the mortgage proceeds.

If you don’t fit into these categories, there may be a limit on the amount of indebtedness (principal) from which you can deduct interest. If you got your mortgage after Oct. 13, 1987, and before Dec. 16, 2017, the limit is $1 million ($500,000 if you and a spouse are filing separately). If you got a mortgage on or after Dec. 16, 2017, the limit drops to $750,000 ($375,000 if you file separately from your spouse).

Other rules apply for mortgage interest deduction. The home secured by the loan has to be your primary or secondary home — or what’s known as a “qualified home,” according to the IRS. If you rent out the second home, you have to use it more than 14 days or more than 10% of the number of days out of the year the home is rented — whichever is longer.

How to claim the mortgage interest tax deduction

To deduct mortgage interest, you need to fill out line 8a on Schedule A (IRS Form 1040 or 1040-SR), using Form 1098. Your lender will send Form 1098 to you either electronically or by mail. Form 1098 shows the lender’s information, your information, the property address, the amount of mortgage interest you paid over the tax year, the amount of principal left, the mortgage origination date and more.

If you paid additional mortgage interest not reported on Form 1098, you can enter the amount on line 8b on Schedule A.

A tax professional can help you decide if it’s more beneficial to itemize deductions or to take the standard deduction. Tax preparation software can also provide you with the info you need to make this decision.

Bottom line

Most taxpayers claim the standard deduction on their taxes rather than itemize deductions —  especially since Congress passed the Tax Cuts and Jobs Act in 2017. The mortgage interest deduction may not be significant enough to itemize, but you can consult with a tax professional about your individual situation to be certain. Also, make sure to check IRS resources for mortgage interest deduction information regarding the specific tax year.