Mortgage Interest Deduction: What Homeowners Need to Know
Mortgage Interest Deduction: What Homeowners Need to Know
It’s tax season. Well, at least for those who don’t file an extension. When one thinks of taxes, one typically thinks of deductions. So, with that in mind, let’s do a quick review of one of the most common: mortgage interest.
Mortgage interest has long been one of the most well-known tax deductions available to homeowners. However, the rules have changed several times over the past decade, and the One Big Beautiful Bill Act (OBBA) finalized many of the current limits. Here’s a simple overview of how the mortgage interest deduction works today.
The Current Mortgage Interest Deduction Limit
Under current law, taxpayers can deduct interest on up to $750,000 of qualified mortgage debt ($375,000 if married filing separately). This limit applies to the total mortgage balance used to buy, build, or substantially improve a primary residence or second home.
The OBBA made this $750,000 limit permanent, keeping in place the restriction that was originally introduced in the 2017 Tax Cuts and Jobs Act. Mortgages taken out on or before December 15, 2017, are "grandfathered" under the older, higher limit.
You Must Itemize to Deduct Mortgage Interest
Before you go looking at how much mortgage interest you paid last year, there a crucial caveat to deducting your mortgage interest: You must itemize to do so.
Mortgage interest is an itemized deduction on Schedule A, which means you cannot deduct it if you take the standard deduction. Because the standard deduction was significantly increased in recent tax laws—and kept high under the OBBA—many taxpayers no longer itemize. In fact, current estimates are that only about 10% of American taxpayers itemize.
As a result, fewer homeowners actually benefit from the mortgage interest deduction than in the past. For example, if your total itemized deductions (mortgage interest, state taxes, charity, etc.) do not exceed the standard deduction, you will usually take the standard deduction instead.
Home Equity Loans and Cash-Out Refinances
Interest on home equity loans is only deductible if the loan was used to buy, build, or improve the home that secures the loan. If the funds were used for other purposes—such as paying off credit cards, buying a car, or funding vacations—the interest is generally not deductible.
This rule did not change under the OBBA, but the law confirmed that these restrictions remain in place.
Mortgage Insurance May Become Deductible Again
Another change included in the OBBA is that mortgage insurance premiums (PMI) may again be treated as deductible mortgage interest beginning in future tax years, subject to income limits.
This primarily affects borrowers who made smaller down payments and are required to carry mortgage insurance. However, itemizing will still be required to claim this deduction.
Main Takeaway:
The OBBA did not dramatically change the mortgage interest deduction, but it made the current rules permanent, including the $750,000 limit and the requirement to itemize. For many homeowners, the key takeaway is simple:
You only receive a tax benefit from mortgage interest if your total itemized deductions exceed the standard deduction.
As a result, the decision to buy a home should be based on financial and lifestyle goals—not just the expectation of a tax write-off.
Everest Wealth Advisors is a wealth advisory firm that helps individuals, families, and business’s navigate complex financial decisions through personalized, goal based planning and disciplined investment strategies.
Ryan Page, CFP®, MBA®
Office & Text:720-826-1092
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor..
