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How to Deduct Mortgage Interest from Your Yearly Taxes

Published: February 7, 2025

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How to Deduct Mortgage Interest from Your Yearly Taxes

Homeownership comes with plenty of financial benefits. Understanding these benefits and how to take full advantage of them can help you keep more of your money in your pockets.

Among those benefits are tax advantages such as Home Mortgage Interest Deduction. This permits homeowners to deduct interest paid on loans secured by their primary or secondary residence. These loans include mortgages used to purchase, build, or substantially improve a home, as well as second mortgages & certain home equity loans.

If you’re unsure whether you qualify, contact your UMortgage Loan Originator! They can either find the answer for you or connect you with a tax professional who can provide accurate guidance.

What Types of Loans Qualify For The Home Mortgage Interest Deduction?

There are strict guidelines regarding the types of loans that qualify for this tax deduction. More broadly, it can be split into two categories: home acquisition debt and home equity debt.

  • Home Acquisition Debt: These are your most typical mortgages. Specifically, loans that fall into this bucket include loans that are used to buy, build, or substantially improve a home.
  • Home Equity Debt: These include loans secured by your home. Not all home equity debt qualifies; the loan proceeds must be used to substantially improve the residence. So, if you used a HELOC or a cash-out refinance specifically to fund a home improvement project, you most likely qualify. If the funds are used for debt consolidation or other personal expenses, you may not qualify.

While the type of loan determines qualification, that’s not the only box that must be checked before eligibility is confirmed. The type of home secured by the loan also plays a part.

  • Primary Residences: If you reside in the home which you’d like to deduct interest paid from, you must reside in the property for at least 51% of the year.
  • Second Homes: This is where it gets a little more complicated. Second homes can be considered something like a vacation home or potentially a rental property, if it passes certain specifications, which we’ll detail below:
    • Second home not rented out: If you have a second home that you don’t hold out for rent or resale to others at any time of the year, you can treat it as a qualified home. You don’t have to use the home during the year.
    • Second home rented out: If you have a second home and rent it out for part of the year, you must also use it as a home during the year for it to be a qualified home. You must use this home for more than 14 days or more than 10% of the number of days during the year that the home is rented, whichever is longer. If you don’t use the home long enough, it’s considered a rental property and not a second home and therefore does not qualify.

How Much Mortgage Interest Can You Deduct?

The amount of interest you can deduct depends on when the mortgage was taken out and its purpose:

  • Mortgages Taken Out Before October 14, 1987: All interest paid is fully deductible, as these are considered "grandfathered" debts.
  • Mortgages Taken Out Between October 14, 1987, and December 15, 2017: Interest is deductible on the first $1 million of mortgage debt ($500,000 if married filing separately).
  • Mortgages Taken Out After December 15, 2017: Interest is deductible on the first $750,000 of mortgage debt ($375,000 if married filing separately). Suppose you entered into a binding contract before December 15, 2017, to close on the purchase of a principal residence before January 1, 2018, and purchased the residence before April 1, 2018. In that case, the higher limit of $1 million applies.

How to Deduct Mortgage Points from Taxes

Did you buy down your interest rate when you purchased your home or refinanced? Those points might be tax deductible.

Points are upfront fees paid to the lender to secure a lower interest rate on your mortgage. So long as the loan qualifies based on the guidelines outlined above—such as the loan being for your primary residence and the points being a standard practice in your area—they can be deductible in the year paid. If these conditions aren't met, the points may still be deductible but spread out over the life of the loan.

To claim the Home Mortgage Interest Deduction, follow the following steps:

  • Itemize Deductions: Instead of taking the standard deduction, you must itemize your deductions on Schedule A of your tax return.
  • Maintain Accurate Records: Keep detailed records of all mortgage interest payments. Your lender will typically provide a Form 1098, which reports the interest you've paid during the year.
  • Complete Schedule A: Enter the deductible amount on the IRS’s Schedule A form, linked here, to reduce your taxable income.

By properly utilizing your Home Mortgage Interest Deduction, you can save a substantial amount of money over the life of your loan. Want to know more ways to save as a homeowner this tax season? Check out our complete guide here.

In all cases, confirm first that you meet the eligibility requirements before filing your taxes—consulting with your UMortgage Loan Originator or a tax professional if clarity is needed.

The information in this blog was sourced from IRS publication 936. Refer to the publication at https://www.irs.gov/publications/p936#en_US_2024_publink1000229990 for more information.

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