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How Home Mortgage Interest Deduction Works

A home mortgage interest deduction is a provision of the United States tax code that offers the advantage for homeowners to deduct the interest paid on mortgages on their principal home or a second home, from their taxable income.


These loans can include first or second mortgages, home equity lines of credit or home equity loans. According to the law, taxpayers can deduct the mortgage interest paid on up to $1 million of acquisition debt, which is debt incurred to build, buy or improve their primary residence and one vacation home. Even boats and other recreational vehicles can qualify as homes, as long as they have cooking, sleeping and toilet facilities.

The second type of qualified debt is the home equity debt of up to $100,000. It is a non-acquisition debt and the proceeds of such a debt are used for anything other than to build, buy or improve the home. The money could be used to pay off credit cards or vacations.

The amount of home mortgage interest paid each year is deducted from the taxpayer’s income for that year, thus reducing the overall tax liability. The key benefit of the home mortgage interest deduction is that of money savings.

While most home equity loans fall under the primary residence category, there can be confusion over what is considered a second home when a taxpayer more than one second homes and this has to be clearly understood before going ahead.


There are limitations to the amount of debt for which interest can be deducted.

 The interest on home equity loans is deducted only on the first $100,000 and anything over this is not eligible.

 To be helped by the MID, a household must still have some tax liability after the credits have been claimed, which means that those on the lowest income levels may not benefit much from this.

But before applying for a home mortgage interest deduction, it is important for taxpayers to understand what an acquisition and home equity loans are. Taxpayers who were subject to the AMT (alternative minimum tax) are only eligible for mortgage interest deduction on acquisition debt where a house has been built, bought or renovated and not on non-acquisition loans.

Taxpayers will have to submit documentation on details such as how the home equity loan has been spent, which determines the amount of the mortgage interest deduction on their tax returns.

This benefit is considered by many as a way of encouraging home ownership. The mortgage interest deduction is defined by the government as a part of the nation’s social policy agenda that is intended to encourage homeownership through a tax subsidy. However, this is a highly regressive policy where the people with the biggest mortgages benefit the most. Since it is primarily beneficial to taxpayers who fall in the middle and upper income groups, it is not very encouraging for the low income groups.


The Obama government budget threatens to cut this home mortgage interest deduction, which experts feel could prolong the housing crisis and deal another blow to home values that have already been hit by the market crash.

Tags: credit, deduction, government, Income, law, loan, market, money, mortgage, policy, tax

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