Your Guide to Mortgage Interest Deductions

Despite a slowing economy and soaring unemployment rates during the COVID-19 pandemic, the American housing market saw an upward trend in sales in 2021. Record low mortgage rates at the onset of the pandemic, a low housing inventory, and increased time spent at home all contributed to the housing boom.

It also seems like 2022 will continue to see a red-hot housing market. The for-sale inventory might be better than last year, but there’s still greater demand than supply for residential real estate. The fierce competition and soaring prices, along with low mortgage rates, are expected to fuel mortgage borrowing once again this year.

If you bought a house during the pandemic and are preparing for the tax season or if you’re applying for a mortgage to buy a house this year, it’s important to educate yourself about mortgage interest deductions. You can use these to lower your tax bill.

What is the mortgage interest deduction?

The mortgage interest deduction reduces taxable income by the amount of interest paid on mortgage debt during the year. The deduction may also include mortgage insurance premiums and related expenses. However, note that the deduction only applies to the interest on your mortgage. It doesn’t apply to the principal. And you can only claim it by itemizing your deductions on your federal income tax return.

If you purchased your home before December 16, 2017, you could deduct the mortgage interest paid on the first $1 million on your mortgage. However, you can only deduct the interest on the first $750,000 of your mortgage debt for mortgages taken out after that date.

What costs and fees qualify as mortgage interest?

Mortgage interest includes any interest from loans used to secure your primary or second home. It may also include other costs and fees. Here’s a breakdown of everything that falls under it:

  • Any interest on your primary residential property
  • Interest on a second home that isn’t for rent
  • Mortgage insurance premiums
  • Late payment fees and prepayment penalties
  • Home equity loans and lines of credit used for home improvement

You may also include mortgage interest deductions if you paid points to lower the interest rate.

Meanwhile, the following aren’t qualified for mortgage interest deductions:

  • Mortgage interest for your third or fourth home
  • Any interest on reverse mortgage loans
  • Homeowners insurance payments
  • Appraisal and notary fees
  • Closing costs and down payment funds
  • Home equity loans and lines of credit used for anything other than property-related expenses

There may be special considerations for deductibles under unique circumstances:

  • If part of your property is used as a home office, only the “living space” qualifies for a deduction.
  • Mortgage interest deduction guidelines give you a 24-month window if you’re building your house.
  • You can still deduct any interest accrued on your mortgage even if you sold the house last year.
  • If you applied for a mortgage refinance last year and paid points to reduce the rate, you may only deduct a portion of your points over the life of the new loan.

Decrease the total tax you pay by taking the mortgage interest deduction. You have until the end of tax season to calculate the deductible amount. But it’s always best to start now.

Contact a Real Estate Agent Today

If you need further information about what qualifies for the mortgage interest deduction and how you can benefit from it if you’re eligible, talk to a mortgage loan expert. You can also contact Blue Pacific Real Estate and we will refer you to one of our mortgage lending partners if you don’t have one.

Blue Pacific Real Estate offers expert assistance for homebuyers. You can rely on our team to help you make a worthwhile investment. Book a consultation today by filling out our online form or calling us at 206-582-7812.

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