How does the mortgage interest deduction work? A guide

Paying interest on your home mortgage might feel like a sunk cost. That said, the tax code gives many homeowners a way to get some of it back. 

The mortgage interest deduction can lower your taxable income by letting you deduct the interest you pay on home loans, potentially saving you hundreds or even thousands each year. But to take advantage of it, you need to itemize your deductions, and that doesn’t make sense for everyone.

How does the mortgage interest deduction work? Here’s a guide to which payments qualify, whether it’s a good idea for your situation, and how to take it if so.

What is the mortgage interest deduction?

The mortgage interest tax deduction allows homeowners to deduct interest paid on many types of home mortgages. It’s a type of itemized deduction, which means you can only take advantage of it if you choose to itemize your tax return rather than take the standard deduction.

The standard deduction is a fixed amount you can subtract from your income without listing individual expenses. If your itemized deductions — like property taxes, charitable donations, and mortgage interest — add up to more than that amount, itemizing could lower your tax bill. That said, most homeowners save more by simply taking the standard deduction.

How does a mortgage interest deduction work?

If you choose to itemize your tax return, mortgage interest is tax-deductible if you used the funds from the mortgage to buy, build, or substantially improve your primary or secondary home. This lowers the amount of income you get taxed on.

There are financial limitations to mortgage deductions. In most cases, you can deduct interest on up to $750,000 of home mortgage debt, or $375,000 if you’re married filing separately. For many homeowners, this deduction is the main factor that makes itemizing worth it, especially in the early years of a mortgage when interest makes up a bigger portion of your monthly payments.

Here’s an example. A couple in the 24% tax bracket for 2024 is reviewing their finances at the end of the year. They’ve paid $17,800 in mortgage interest, made several charitable donations, and paid local property taxes. Altogether, their itemized deductions total $31,600. Since that amount is higher than the $29,200 standard deduction, itemizing gives them a bigger tax break and allows them to claim the mortgage interest deduction, which makes it the better choice.

What qualifies for a mortgage interest deduction?

The IRS lets you deduct a few different types of home loan interest. In most cases, the loan must be tied to your home and used to buy the house, build it, or make major improvements.

Deductible expenses

— Interest on a mortgage for your main home: To qualify, the home must be your primary residence and meet basic requirements set by the IRS. Typically, that means it has sleeping, cooking, and toilet facilities.

— Mortgage interest deduction on a second home: One second home can also qualify for the mortgage interest tax deduction, as long as you use it for personal reasons for more than 14 days in the year or more than 10% of the total days it’s rented out — whichever is greater.

— Interest on a HELOC or home equity loan: You may be able to deduct interest on a HELOC or home equity loan, but only if the funds were used for work that adds value to the home that secures the loan, like a kitchen renovation.

— Interest on a home under construction: If you’re building a home that will eventually serve as your main or secondary residence, you can deduct interest paid during construction for up to 24 months.

— Mortgage points: Points are upfront fees you can pay your lender at closing to lower your mortgage interest rate. If you paid points, they may count as prepaid interest, which means you can deduct them. You can either deduct the full amount in the tax year you paid them or spread it out over the loan term.

— Prepayment penalties: Some lenders charge prepayment fees if you pay off your mortgage early. These fees are deductible if the IRS considers them interest.

Non-deductible expenses

Some common home-related costs aren’t eligible for the mortgage interest deduction, including:

— Payments made toward the loan principal

— Down payments

— Closing costs (except points)

— Homeowner’s insurance

How much mortgage interest can you deduct?

For most homeowners, the deduction is limited to interest on the first $750,000 of mortgage debt, or $375,000 if you’re married filing separately. These limits apply to loans originated after December 15, 2017. If your mortgage was taken out before that, you may be able to deduct interest on up to $1 million of debt, or $500,000 if filing separately.

Knowing how much interest you’ll pay — and whether it’s enough to make itemizing worth it — gives you a head start on tax season. With Better’s 3-minute online mortgage pre-approval, you get a personalized look at your potential loan terms and interest costs. See potential savings upfront and make the right decisions right from the start.

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How do you claim the mortgage interest deduction on your taxes?

If you decide to take the home mortgage interest tax deduction, here’s how to claim it:

1. Get your Form 1098: Your lender should send you the IRS Form 1098 by January or February if you paid at least $600 in mortgage interest for the tax year. It shows how much interest you paid and if any points were included.

2. Compare your deduction options: Calculate your tax deduction for the mortgage interest you paid over the past year. Start by adding up itemized deductions, like mortgage interest, property taxes, and charitable contributions, and compare that total to the standard deduction. Your preferred tax software can guide you through the process. Choose the option that results in a lower overall tax bill.

3. File Schedule A: Once you’re sure that itemizing your tax return makes financial sense, use IRS Schedule A to report your deductions. This is where you list the mortgage interest amount from Form 1098, along with any other eligible expenses.

Plan ahead with Better interest estimates

The mortgage interest tax deduction can be a meaningful source of savings — but only if your itemized deductions add up to more than the standard.

Ready to ditch the uncertainty? Better shows you projected interest costs upfront to give you a clear picture of your potential tax benefits before you commit to a loan. The process happens completely online, and checking your eligibility takes as little as 3 minutes with no impact to your credit score. It’s a faster, simpler way to plan ahead — and a smarter way to borrow.

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Frequently asked questions 

What are the pros and cons of a mortgage interest deduction?

The main benefit of a mortgage interest deduction is a lower tax bill, but this only comes into play if your itemized deductions add up to more than the standard deduction.

Why are some types of mortgage interest not tax-deductible?

Mortgage interest is only deductible when you use the loan to buy, build, or improve a qualified home. If you use a home equity loan or HELOC for non-housing expenses, like consolidating debt or paying university tuition, you can’t deduct the interest.

Can co-owners of a property deduct mortgage interest?

Yes. Co-owners who are both legally responsible for the mortgage and who pay interest can each deduct their share, as long as it’s properly documented. Each person should receive or request their portion of Form 1098.

Can I deduct mortgage interest on a second home?

Yes, but only one second home qualifies per year. You must also use the home for personal purposes for at least 14 days or 10% of the rental days during the tax year.

Is mortgage insurance tax-deductible?

No. There was a deduction for mortgage insurance premiums, but it expired after 2021.